EU Launches Deficit Procedure Against Germany

The European Commission has formally initiated disciplinary action against Germany for exceeding the deficit ceiling laid down in the European Union’s Growth and Stability Pact. Launching the “excessive deficit procedure” in Strasbourg on Tuesday, Monetary and Economic Affairs Commissioner Pedro Solbes blamed Germany's government for the breach, and said the downturn in the global economy and the recent floods were not the deficit's chief causes.

The Stability Pact limits the fiscal deficit of countries belonging to the European Monetary Union to 3 percent of gross domestic product (GDP) in any one year. Article 104 of EU Charter lays down the procedure the Commission has to follow, culminating in a demand for a deposit of between 0.2 and 0.5 percent of GDP to be lodged with Brussels.

The worst thing is probably the embarrassment

In theory, this deposit could be converted into a fine if the country in question persistently ignores instructions from the Commission and fails to balance its budget. But, even then, such a move would require a two-thirds majority in a vote in the EU’s Council of Ministers.

In fact, the main consequence of a violating the Stability Pact seems to be a huge loss of face. In Germany’s case, this is particularly extreme because the three-percent rule was adopted in 1997 at Berlin’s behest. Chancellor Helmut Kohl and his finance minister, Theo Waigel, saw it as the best means to promote fiscal responsibility across the eurozone.

Adding to Germany's embarrassment, the Commission has also expressed doubt that Finance Minister Hans Eichel will manage to get his budget back on track next year. Eichel will have to tackle the opposition to his austerity plans -- even within his own party -- if he is to succeed.

Due to a massive tax revenue shortfall the German government is due to approve an emergency €13.5 billion increase in net borrowing this year, bringing the total to €34.6 billion ($35 billion). Next year's budget has also been revised after the projected €15.5 billion in borrowing was increased to €18.9 billion.

The deficit could be contageous

Germany is not the only country which has been having trouble with the deficit cap. Disciplinary measures have already been taken against Portugal, and Solbes has said the French government will be given an early warning because it also could go through the ceiling in 2003. The Italian economy is also a cause for concern in Brussels.

This has led to calls for the pact to be scrapped, or at least relaxed. But both Eichel and his French counterpart, Francis Mer, agreed last month that the credibility of the euro would be weakened if its two largest economies were seen to flout the deficit rule.