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Germany Avoids Record 2003 Deficit

The German Finance Ministry confirmed over weekend that Germany’s deficit spending in 2003 did not reach feared all-time record levels due to slightly better tax revenues. But Berlin’s budgetary woes are far from over.

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German Finance Minister Hans Eichel appears to have found some extra cash.

Instead of the record €43.4 billion ($55.7 billion) deficit that German Finance Minister Hans Eichel had forecast last autumn, Germany only had to borrow around €39 billion to cover its spending last year. The highest ever amount borrowed to finance Germany’s deficit was €40 billion in 1996.

The Finance Ministry confirmed reports in the German media that Eichel will present the lower debt figures to a parliamentary budgetary committee next week. Der Spiegel news magazine said the government benefited from higher-than-expected tax revenues and lower expenditures at the Federal Labor Office.

Despite Berlin’s slightly improved financial situation, Germany’s budgetary problems are likely to continue in 2004. A spokesman for the Finance Ministry told the Associated Press that in particular the strong euro, which continues to make new highs against the U.S. dollar, could have an impact on the Bundesbank’s profits this year.

And perhaps most troubling for Eichel, it would appear the European Commission is preparing to take legal action against EU finance minister for effectively suspending the disciplinary procedures against those countries currently flouting the budget deficit rules of the EU’s Growth and Stability Pact, which was designed to underpin the euro.

Verheugen expects action

Günter Verheugen, a German EU Commissioner, said in an interview publish on Saturday that both Commission President Romano Prodi and EU Monetary Affairs Commissioner Pedro Solbes had decided in favor of going to the European Court of Justice over the matter. After considering advice from its legal department, the Commission is expected to officially decide what course of action to take on Tuesday.

Günter Verheugen

Günter Verheugen

“I reckon the decision will follow what Prodi and Solbes suggest,” Verheugen told the Suttgarter Zeitung. Verheugen has said he personally would prefer to avoid litigation.

Led by the Germany and France, EU finance ministers in November opted to suspend the sanctions process against those breaching the pact, which dictates that euro zone members are supposed to keep their budget deficits under three percent of gross domestic product. Both Berlin are Paris are set to break the deficit limit for a third consecutive year in 2004.

If the Commission pursues legal action and wins, both Germany and France, the two largest euro zone economies, could face fines running into billions of euros. According to the Frankfurter Allgemeine Sonntagszeitung newspaper, the European Central Bank (ECB) looks unfavorably on the possibility of legal action over the matter, despite being a staunch supporter of the stability pact. Citing high-ranking ECB sources, the paper said Europe’s monetary authorities fear a messy court battle could weaken trust in EU institutions regardless of which side wins the case.

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