EU steps up pressure on Germany over deficit

1st March 2006, Comments 0 comments

1 March 2006, BRUSSELS - The European Commission on Wednesday warned Germany to slash its excessive budget deficit by end-2007 or face disciplinary action under eurozone fiscal rules.

1 March 2006

BRUSSELS - The European Commission on Wednesday warned Germany to slash its excessive budget deficit by end-2007 or face disciplinary action under eurozone fiscal rules.

The Commission - the European Union's financial watchdog - said Europe's largest economy had only four months to hammer out policies designed to rein in its budget deficit.

The EU move came as German Chancellor Angela Merkel's Christian Democrat (CDU/SCU)-Social Democrat (SPD) government marked its first 100 days in office.

Upping the pressure on Berlin, European monetary affairs chief Joaquin Almunia said he was recommending that eurozone governments "give notice to bring the public deficit below 3 per cent of Gross Domestic Product (GDP) by 2007 at the latest."

Eurozone finance ministers are expected to decide on the issue on March 14.

Germany's budget deficit currently stands at 3.3 per cent of GDP, the fifth year running that Berlin has been in breach of eurozone fiscal rules which set a 3 per cent of GDP ceiling for national budget deficits.

Almunia told reporters he expected German Finance Minister Peer Steinbrueck to provide details of how he intends to correct the deficit in July this year.

"I am convinced the German government will respect these recommendations," he said, adding: "I am optimistic."

In comments made in Berlin, Steinbrueck said Germany accepted the Commission decision because it was vital to ensure the "lasting credibility" of the eurozone stability pact.

The German finance chief insisted there would be no repeat of the conflict between Berlin and the Commission which followed the EU executive's initial action on the German budget deficit in November 2003. Berlin will adopt "model behaviour," he said.

Steinbrueck said efforts to comply with the 3 per cent of GDP target in 2006 would have jeopardized Germany's fragile economic recovery. As a result "consolidation measures" would only start in 2007, he said.

As demanded by the Commission, Germany will register a one percentage point improvement in its structural deficit in 2006 and 2007, he vowed.

In equally conciliatory remarks, the Commission said it was confident that steps being taken by the new German government to put national finances in order meant the deficit could go "well below" the 3 per cent of GDP ceiling by 2007.

But he warned that given the still-fragile economic situation in the country, more efforts were needed to improve national finances.

"Although the Commission welcomes the renewed priority attached by the German government to budgetary consolidation, it is clear that (the excessive budget deficit) procedures needs to be stepped up to guarantee a lasting correction of the deficit," Almunia said.

The EU monetary affairs chief praised Steinbrueck's efforts to streamline German finances, saying the reduction in Germany's budget deficit in 2005 to 3.3 per cent of GDP was "good news."

The Commission said last week it expected economic growth in Germany to pick up by 1.5 per cent in 2006, saying the flagging economy was gaining momentum due to strengthening investments, rising domestic demand as well as a continuing good performance in the export sector.

However, Almunia insisted he wanted to see measures ensuring that the deficit was declining in a "permanent and sustainable way."

"A decisive correction of the excessive deficit is essential given the low growth potential and the budgetary challenges from an ageing population," the Commission added.

Almunia also insisted that action against Germany was needed to prop up the credibility of the much-breached eurozone stability pact.

"This decision shows that nobody - not even Europe's biggest economy - is exempted from EU rules," Almunia said. The pact was being "applied equally to all countries," he said.

France, Italy and several other eurozone countries have also overshot the pact's 3 per cent of GDP rule. Like Germany, however, all countries have escaped financial sanctions.

Berlin submitted an updated national financial blueprint for 2005- 2009 to the Commission last week which promised to reduce the budget deficit to 2.5 per cent in 2007, dropping progressively to 1.5 per cent of GDP in 2009.

The Commission said the German budgetary adjustment strategy was based both on revenue increases and expenditure cuts.

In addition to reducing tax allowances and increasing the standard Value Added Tax (VAT) rate from 16 per cent to 19 percent, Germany planned to restrain social spending as a key element of its budgetary adjustment plan, the Commission said.


Subject: German news

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