Germany Warned Over Budget Deficit

The European Commission said on Wednesday it would give Germany until May to get its economy back on track after it became the second country in the eurozone to breach the Stability and Growth Pact.

The pact, which governs financial discipline in the eurozone obliges its members to keep their budget deficits under 3 percent of gross domestic product. If they don’t, countries have 12 months to bring their economies back within the 3 percent threshold or else risk fines.

The Commission has now given Germany four months to react to Wednesday's warning and to push forward with measures necessary for reform. According to EU commissioner Pedro Solbes, Germany could reduce its budget deficit significantly if the aims set by the current government in the red-green coalition pact were fulfilled.

Portugal, Germany

Germany is the second country to breach the rules governing the euro, after Portugal exceeded the 3 percent limit in November 2001, with a budget deficit of 4.1 percent.

Germany breached the ceiling in 2002 with a deficit of 3.75 percent. With its economy still weak, economists predict that Germany will break the pact again in 2003.

If Germany fails to reduce its budget deficit in the coming year, it faces fines of up to 10 billion euro, or 0.5 percent of Gross Domestic Product.

Schröder growth predictions claimed unrealistic

Schröder has so far been adamant that he can bring the German budget deficit within the 3 percent ceiling this year if the economy grows at 1.5 percent. The German Institute for Economic Research (DIW), however, recently dismissed these predictions as “totally unrealistic”, saying prospects for growth were far more gloomy, estimating GDP growth at 0.6 percent in 2003.

Economics Minister Wolfgang Clement rejected the DIW's bleak forecasts, repeating the government's optimism that unemployment would start to fall due to government-introduced, streamlined job placement and other measures.

The harsh deadline set out by the EU could hardly come at a worse time for the German government. Gerhard Schröder’s red-green coalition have already made themselves deeply unpopular by pushing through an austerity package of tax hikes and spending cuts, and are now facing possible massive public sector strikes after demands for a percent pay rise were largely ignored.