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Europe

Brussels Deficit Warning Hits Berlin

A fresh warning from Brussels over deficit spending unleashes a new debate in Berlin over Germany's need to undertake fundamental structural reforms of its budget-making process and healthcare and pension systems.

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The EU has asked German Finance Minister Hans Eichel to take a red pen to his 2003 budget

On Wednesday, Brussels drew public attention to a fact that has been the fodder of newspaper covers across Germany for weeks: Berlin's 2003 budget is filled with more holes than a loaf of Swiss cheese -- and the number seems to be growing by the day.

European Commissioner for Economic Affairs Pedro Solbes (photo) rebuked Germany for deficit spending in 2002 of 3.8 percent and warned that the country is at great risk of breaking EU deficit caps of 3 percent of gross domestic product set forth in the Maastricht Treaty again in 2003, saying the government's forecast of 1.5 percent growth is "too optimistic" and that the deficit problem was homemade and not the result of the global economic downturn.

Solbes' statement marked the second time Germany has been scolded in the past year for breaking the rules it designed itself in 1997 to ensure fiscal and economic stability in the euro zone.

Setting a firm deadline of May 21, Solbes called on Germany to revise its 2003 budget to bring it below the 3 percent ceiling , to push through the complete labor market reform package proposed by the government and to undertake painful reforms of its national healthcare and pension systems.

Solbes said Germany must also reduce its notorious levels of bureaucracy in order to pare its overspending, and raised special attention to the government's Hartz Plan for labor reform, which he said should be passed in its entirety. So far, only provision aimed at promoting temporary labor and partially subsidized low-wage jobs have been passed by parliament.

Above all, he said these changes should be "legally binding."

Seeking sympathy for Brussels

Though embarrassing, the warning could actually help Chanceller Gerhard Schröder's government push through a series of difficult tax hikes and labor market and social insurance reforms. But some members of Schröder's cabinet were still licking their wounds on Thursday.

EU Wirtschafts- und Finanzminister Pedro Solbes ist müde

Pedro Solbes

Defending his track record on German public television, recently appointed economics and labor superminister Wolfgang Clement (photo) said the government had already taken important steps toward implementing labor market reforms and that more would be taken this year. He also stood firmly behind his economic prognosis, despite the threat of war in Iraq.

Clement said Brussels should recognize the fact that Germany is working under considerable pressure to reform its ailing economy while at the same time dishing out billions of euros for the EU's eastward expansion and the rebuilding of Germany's formerly communist east while still maintaining a powerful economy.

But his plea was met with a dose of tough love in Brussels. "We're absolutely sympathetic in the sense that we are aware that Germany is the main economy of the area and that what happens to Germany is very relevant for all of us," Solbes told DW-RADIO in Brussels. "We are trying to help Germany and to increase its rate of growth in Germany, which I think is the best solution for all the problems." The course Germany ultimately decides to take will have implications for the entire euro zone.

"It's a further bankruptcy declaration for the government"

Meanwhile, leaders of Germany's opposition parties took the opportunity to criticize the track record that landed the current government in hot water with the European Commission while at the same time offering to cooperate to rush through some of the reforms Brussels has demanded.

EU warnt Bundesregierung wegen zu hohem Haushaltsdefizit, hier Wolfgang Clement

Wolfgang Clement

"It's a further bankruptcy declaration for the government," said the Christian Democratic Union's Friedrich Merz (photo), who is vice chairmen of the party's parliamentary group. Merz criticized the government for having undertaken "half-hearted reforms" instead of the sweeping structural reforms that are needed.

At the same time, Bavarian Premier and ex-chancellor candidate Edmund Stoiber -- speaking for his party, the Christian Social Union, and its bigger sister party the CDU -- said Thursday the opposition would support the government coalition to push through needed economic and social policy reforms.

Berlin faces "painful" cuts and possible fines

And the government seems prepared to make deeper cuts into its budget. German Finance Minister Hans Eichel said he would undertake "painful measures" in order to bring the budget he stewards down to an acceptable level.

On Thursday, he called on the German states to "share the responsibility" for the growing deficit by approving new taxes forwarded to the Bundesrat by the government that would help cover the budget shortfall. The Bundesrat, Germany's upper legislative chamber, is controlled by the premiers of the country's 16 federal states, at current the opposition has a slight majority. It is this majority, however, which may prove obstructive to the further implementaion of the government's labor reforms.

At present, the stakes seem to be growing by the day. In an interview with German public radio, Germany's representative on the European Parliament's Economic and Currency Committee, Christa Randzio-Plath, said the pressure being placed on Berlin is "considerable." A vote against the reforms in the Bundesrat, she said, would be "irresponsible."

For the government, the clock is ticking: If Germany is unable to fall within the 3 percent deficit spending ceiling stipulated by the Stability and Growth Pact regulating the success of the euro, Europe's common currency, it could face fines from Brussels in 2004 reaching as high as €10 billion ($10.5 billion).

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