Germany Off the Hook

German Economics Minister Hans Eichel had mounted a bid to get Germany off the hook after Chancellor Schröder said a formal warning would be unacceptable.

Facing an election in September, a formal warning from Brussels would have been one more in a series of political blunders that has shaken his cabinet in recent weeks.

Showing more weakly than he would like in opinion polls, Schröder has embarked upon something of an anti-Brussels crusade, lashing out at the European Commission for recommending Germany is warned for its rising budget deficit and criticising its plans to increase competition in the way cars are sold.

"Schröder is not afraid of breaking china in Brussels if he can save the furniture at home," said Henrick Uterwedde, a European analyst from the German-French Institute in an interview with Reuters, alluding to the up and coming national elections in September.

But the value of this china is high. Economists in Germany and abroad have questioned whether Schröder's tactics, in the face of criticism for Germany's deficit, could undermine faith in the new Euro's stability.

While Germany has not actually breached the Eurozone stability pact’s 3 percent deficit ceiling, it is getting dangerously close to it.

Despite the economics minister's promises that Germany would do all it could to balance its budget by 2004, several small EU countries insisted that Germany should not be allowed off the hook.

"We have a clear position. We are in favour of an early warning to Germany. There cannot be a split. We must all be treated equally," Austrian Finance Minister Karl-Heinz Grasser said on his way into the talks.

Several large EU members had argued against a formal warning, saying the commission was taking too narrow a view in Germany’s case.

Instability looming?

The Frankfurter Allgemeine daily said the writing for future instability as a result of Schröders comments was on the wall.

The Chancellor’s criticism of the budget warning, plans to deregulate the car sales market and his support for regional state aid could hurt the euro and Europe's reputation as a business location.

"Should the solidity of the new currency be left in the lurch just because the Commission's fiscal warning does not fit into Mr Schroeder's campaign concept?" it asked in an editorial.

Economists and analysts also expressed concern.

"It smells like political influence going on behind the curtain, and it weakens the stabiluty pact," Manuela Preuschl, a senior economist at Deutsche bank said in an interview with BBC Radio.

In the event, the euro remained steady at around 0.8770 to the US dollar.