Germany and EU Divided Over 2005 Deficit

Germany is heading for budget deficits of 3.4 percent of gross domestic product (GDP) in 2005 and 2.9 percent in 2006, according to a European Commission's forecast published Tuesday. Thus Europe's biggest economy would once more breach the EU Stability and Growth Pact that underpins the euro and requires countries using the currency to keep their deficits below 3 percent of GDP.

But Germany's Finance Minister Hans Eichel rejected the forecast.

"We want to abide by the pact and present a budget in conformity with the Constitution," said Eichel's spokesman, Jörg Müller, on Tuesday, according to the Associated Press. Müller pointed out that German government expects growth of 1.7 percent next year, while the EU executive predicts 1.5 percent growth, a difference that amounts to hundreds of millions of euros in tax revenues.

Besides the restrictions laid down by the stability pact, Germany's constitution requires governments to balance their budgets.

The European Commission's forecast resembles those of Germany's leading economic institutes, the majority of which have said the country's budget deficit would drop from to 3.5 percent of GDP in 2005 from 3.9 percent in 2004.

Searching for a way out

Eichel has been under pressure lately to find a way to fill up state coffers and has given no indication of what he will do.

Plans circulated by his ministry said he was considering making a deal with the formerly state-owned postal and telecommunications companies Deutsche Post and Deutsche Telekom to stock up the treasury. But after examining the idea, which involved the government assuming long-term pension commitments for billions of euros in quick cash, Eichel rejected it.

At the same time, German Chancellor Gerhard Schröder and French President Jacques Chirac -- whose country also has a three-year history of breaching the 3 percent ceiling -- tackled the EU executive and the euro criteria from another angle on Tuesday.

At a joint news conference with Chirac in Berlin, Schröder said he and his colleague believed changes to the stability pact must go beyond European Commission proposals. Despite deficits, euro-zone countries should be given "more space" for investments in education and research.

Last year, the pact suffered a major blow when France and Germany managed to avoid disciplinary action for breaching the deficit limit much to the ire of smaller countries, some of which have bent over backwards to follow the rules.

Austria's Finance Minister Karl-Heinz Grasser said in the Thursday issue of business weekly WirtschaftsWoche that the European Commission must again start action against Germany for violating the pact or risk losing even more credibility.

He also spoke out against the commission's proposals to loosen the pact giving countries suffering from weak economic phases more time to bring down their deficits.

"That is a clear softening of the stability pact -- that won't happen with me," Grasser said.