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Budget crisis forces Berlin topush for relaxing fiscal rules

11 May 2004

BERLIN – Faced with a mounting budget crisis, the German Government has raised the prospects of a renewed push for a relaxation in the strict budget rules for euro member states as deep divisions in the ruling coalition have emerge over how to deal with the nation’s ballooning deficit.

Speaking in Berlin Tuesday, Franz Muentefering, the chief of Chancellor Gerhard Schroeder’s ruling Social Democrats called on Germany’s European partners to consider changes to ease the strict three per cent of GDP target for budget and debt levels as set out in the so-called Growth and Stability Pact for euro member states.

While saying that the stability pact should not be abandoned, Muentefering said Europe must decide however, which three percent criterion is the more important: the three percent in the stability pact or three per cent of the gross domestic product which Berlin wants to spend on for research, education and development in the years to 2010.

A weaker-than-expected economic performance combined with a dramatic slump in tax revenue and high unemployment has plunged Germany into a budget crisis raising the prospects that Europe’s biggest economy will again overshoot the stability’s pact tough deficit targets.

Speculation that official estimates to be released on Thursday will show a shortfall in tax revenue this year of about EUR 14 billion has led to splits in the ranks of Schroeder’s Social Democrat-Green Party coalition with leading government members arguing against further big spending cuts to try to knock the nation’s public finances into shape.

Economists are already predicting that Germany’s budget deficit will hit almost four percent this year after coming in at 3.9 percent last year.

The scale of the nation’s budget problems has placed enormous pressure on Finance Minister Hans Eichel with the government forced to issue almost daily denials of speculation that Schroeder planned to drop the embattled minister.

A shortfall in tax income of EUR 14 billion is about EUR 7.5 billion more than estimated with Eichel admitting on the weekend that Germany now faced the likelihood of busting the stability pact’s fiscal rules for a fourth year in 2005.

Like France, Germany gave its European partners an undertaking last November that it would knock its public finances into shape so as to bring its deficit back into line with the pact in 2005.

Another big slump in revenue also raises the risk of Berlin being forced to seek out new government borrowing, with fears it could hit a post-Second World War record this year of more than EUR 40 billion. A total of EUR 29.3 billion is currently planned.

But while Berlin has insisted that it had no plans to scrap its deeply unpopular welfare and labour market reforms, leading ministers are arguing that the nation’s budget deficit should be allowed to swell as a way of helping to spur economic growth instead of pressing forward with budget consolidation by launching another round of tough spending cuts.

However, coming on the eve of key European, regional and state elections, the prospects of a blow out in the budget has triggered a wave of speculation both in the media and from ministers about how the government should respond to the nation’s growing deficit problem.

Government spokesmen have rejected reports that Eichel had called for a radical financial programme including a hike in VAT to 21 percent from its current level of 16 percent.

This would have raised EUR 45 billion which would be enough to keep the 2005 budget deficit below the three percent fiscal target for euro-member states.

A call by the nation’s powerful Labour and Economy Minister Wolfgang Clement to scrap the tax-free allowances for savings has also been rejected by the government.

The centrepiece of Berlin’s spending plans is the launch a programme of more than one billion euros to revive education and innovation, which it hopes will funded by convincing the nation’s central bank, the Bundesbank to sell off gold reserves and sale of stakes in the partially privatised phone giant Deutsche Telekom and post office Deutsche Post.

Confirmation that Germany’s economy is still battling to haul itself out of three years of stagnation is likely to emerge this week with official data also to be released Thursday tipped to show first-quarter growth coming in at less-than-sparkling 0.5 percent year-on-year with a recent batch of figures raising fresh doubts about the nation’s recovery.

While unemployment rose more than expected in April, output slumped by 2.3 percent in March and key factory order book data dropped by 0.7 per cent in March. Retail sales also remain weak.

But with private economists scaling back their projections for the year, Berlin has now also been forced to revise down its 2004 growth forecasts from 1.7 percent to 1.5 percent.

The government says it needs a two per cent growth rate to bring Germany’s deficit below two percent.

The chances of Germany again overshooting the stability pact’s fiscal target also coincides with the launch in the European Court of Justice of a European Commission case against European Union finance ministers after they decided not to take disciplinary action against Germany and France after both nations allowed their deficits to overshoot the pact’s three per cent threshold.


Subject: German news