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Germany To Violate Deficit Rules for Second Year

The German Finance Ministry admitted on Friday deficit spending in Berlin will exceed euro stability pact limits for a second year in a row. If EU budgetary limits are breeched next year, Brussels may impose sanctions.

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Berlin will have to cut back public spending to bring the budget in line with EU rules.

Although the news was long expected, Finance Minister Hans Eichel officially confirmed Friday that German public deficit spending would exceed the limit set forth in the Maastricht Treaty for the second year in a row. But with an estimated budget deficit hitting 3.8 percent of gross domestic product for 2003, Berlin delivered a figure higher than previously expected.

Only as recently as July, the ministry was still forecasting maximum deficit spending of 3.5 percent – the same amount Germany booked last year. But as Germany’s economy has stalled this year, the government has been required to borrow more.

German Finance Minister Hans Eichel attributed the deficit prognosis to the "still restrained national economic developments that have created additional burdens for the labor market." The deficit has also been compounded by a decrease in tax revenues, which the government said were lower in summer than spring.

In the run-up to the announcement, German Chancellor Gerhard Schröder began a campaign in the media seeking to persuade Brussels to interpret the Maastricht rules more loosely. Though Germany is home to the largest economy within the EU, it is also currently the weakest. And Schröder is seeking to find more wiggle room to help spark growth.

"We don’t want to leave the stability pact, but we want to interpret it in an economically sensible way," Schröder told a group of foreign correspondents in Berlin this week, according to the Financial Times newspaper. The chancellor added that he believed his view is "shared by the French government and I haven’t seen Italy taking a different position."

Breaking the 3-percent limit

Under the Maastricht Treaty, EU members with the euro cannot have budget deficits larger than 3 percent of gross domestic product in order to maintain the stability of the common currency. If a euro zone country violates the treaty three years in a row, the European Commission can impose sanctions ranging from taking greater control over national budget-making decisions to levying fines that can run as high as 0.5 percent of a country’s gross domestic product.

During a trip to Brussels earlier this week, French Prime Minister Jean-Pierre Raffarin said his country would continue to support the stability pact, but he called on the European Commission to be more "flexible" about its interpretation. Earlier this week, the Parisian financial newspaper Les Echos reported that the French Finance Ministry feared a deficit that could run as high as 3.9 percent this year.

"Europe will do its job, and the French government will do its job," Raffarin said at a joint press conference with European Commission President Romano Prodi on Wednesday. "My primary responsibly is to do everything to increase growth and improve employment."

Fair treatment

But smaller EU countries are angered by attempts in Berlin and Paris to water-down the stability pact – led by countries like Austria and the Netherlands, which have worked hard to balance their budgets.

Schröder, meanwhile, called for "fair treatment" from the Commission. In the past, Schröder and his foreign minister, Joschka Fischer, have both hinted that Berlin has an understanding with Brussels that penalties will not be imposed next year if the limits are breached, the Financial Times reported.

And at the moment the Commission is remaining optimistic it won’t have to. On Friday, a spokesman for the EU’s Monetary Affairs Commissioner, Pedro Solbes, told reporters that as long as Germany continued with its strict budgeting plans and economic and social system reforms that there was a "good possibility" the country’s deficit spending would fall below three percent again in 2004 and that economic growth that year could reach 2 percent.

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