Germany Braced to Break Stability Pact Again

Germany's public deficit soared to a massive 4.0 percent of gross domestic product (GDP) in the first six months, according to recently compiled data. That takes the country dangerously close to breaching the European Stability and Growth Pact for the thrid year in a row.

Under the terms of the pact, euro zone countries are not allowed to run up public deficits in excess of 3.0 percent of GDP.

But Germany, the euro zone's biggest economy, was in breach of that limit in both 2002 and 2003. And the government has warned that it expected the deficit ratio to exceed 3.0 percent again this year.

Third time unlucky

The federal statistics office, Destatis, calculated on Tuesday that the German public deficit -- which comprises the federal government, regional state and municipal as well as the social security budgets -- totaled €42.7 billion ($52 billion) in the period from January to June. That was equivalent to 4.0 percent of GDP, which amounted to €1.07 trillion in the same period. In the corresponding period a year earlier, the German deficit ratio had stood at 3.6 percent. And for 2003 as a whole, the deficit amounted to 3.8 percent of GDP.

Both the statistics office and the finance ministry insisted that the half-yearly figures could not be extrapolated for the year as a whole. But it is widely accepted that the full-year deficit ratio will be in breach of the 3.0 percent rule.

At the end of July, Bundesbank President Axel Weber had already said that the 2004 deficit ratio "could well exceed" last year's level of 3.9 percent.

Berlin has pledged to bring the deficit back within EU limits in 2005. But many experts remain skeptical whether that goal can be achieved and Bundesbank chief Weber estimated a further €7 billion in belt-tightening measures would be necessary.

EU anger at repeat offenders

Germany and a growing number of other euro zone countries have failed to rein in their budgets sufficiently, much to the ire of the European Commission in Brussels and the European Central Bank. The repeated violations of the budget rules by Germany and France triggered so-called excessive deficit procedures against the euro zone's economic heavyweights.

The issue even sparked an EU-wide crisis in which the budgetary sinners, who were calling for a relaxation of the rules, were pitted against smaller countries who had taken painful measures to get their finances in order.

And the situation escalated further when the EU council of ministers decided last November to let Berlin and Paris off the hook. Incensed, the EU Commission sought to oppose the decision by taking the case to the European Court of Justice.

Europe's highest court eventually found that the council of ministers was indeed wrong to let off the two budgetary sinners. But it added that euro zone governments had the right to throw out the commission's advice regarding what action to take to bring down their deficits.

Economic signs regularly bring hope

Evidence that the economy is finally picking up could make the German government's task of cutting its deficit easier. "Positive second-quarter growth strengthens our conviction" that the deficit ratio will fall back below 3.0 percent next year, a finance ministry spokesman told news agency AFP.

According to separate data published by Destatis on Tuesday, the German economy grew by 0.5 percent in the second quarter of 2004, a slightly faster rate of growth than the 0.4 percent clocked up in the previous three months. However, the slight pick up in growth was solely attributable to strong foreign demand for German-made goods, with exports rising by 3.2 percent in the April-June period, Destatis said.

By contrast, domestic demand remained weak, contracting by 0.1 percent on a quarterly basis in the period from April to June, after already falling by 0.8 percent in the previous three months, Destatis calculated.

The lop-sided nature of recovery could become even more of a problem if drastic social reforms and news of continued high unemployment make consumers even less ready to spend.

Furthermore, the soaring price of oil could also put the brakes on economic growth and jeopardize the German government's growth targets for this year.