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Germany

Schröder Defends Suspending Euro Stability Pact

German Chancellor Gerhard Schröder on Wednesday defended a decision to suspend the EU’s deficit rules in order to promote euro zone growth. But he also told parliament that Germany would continue budgetary consolidation.

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"We have to pull tax cuts forward to support growth," Schröder says.

Addressing parliament during a debate on the 2004 budget, Schröder said Berlin needed to give priority to bringing forward planned tax cuts by one year to help get Europe’s largest economy back on track.

“We need consolidation without question,” Schröder said. “But we need to stimulate growth. We have to pull these tax cuts forward to support growth.”

Schröder’s comments came one day after German Finance Minister Hans Eichel in Brussels pushed successfully for the suspension of disciplinary action against those countries currently flouting the budget deficit rules of the EU’s Stability and Growth Pact.

“I’m thankful that the finance minister was able to achieve what was economically sensible,” Schröder said.

The European Commission had demanded Germany and France undertake further steps to reduce their deficits under the pact’s three percent of gross domestic product limit, but EU finance ministers instead agreed to a political commitment from Berlin and Paris to pursue budgetary consolidation. The euro zone’s two largest economies are set breach the deficit limit for the third year in a row in 2004.

Eichel irked?

Eichel was apparently irked at the hard line the Commission had taken even though Berlin had been more cooperative with Brussels on the deficit than the French. Brussels wanted Berlin to slash its deficit by 0.8 percent of GDP and could have imposed fines had the Germans failed to comply. Germany is now aiming to for cuts of 0.6 percent of GDP next year.

The deal to postpone disciplinary proceedings effectively leaves the Stability Pact, which is meant to underpin the euro, in pieces, angering both the Commission and the European Central Bank. Smaller countries such as the Netherlands, Finland and Austria all opposed weakening the pact, fearing larger countries will feel free to ride roughshod over the rules again in the future.

Opening the debate for the conservative opposition, Michael Glos criticized Berlin and Paris and said the government was taking an axe to the roots of the euro. “If I were in your place I’d do everything not to go down in history of the Federal Republic of Germany as the gravedigger of the Stability Pact,” Glos said. But Schröder said the pact just needs to be reinterpreted to better deal with Europe’s economic reality. “Not everything the Commission suggests is sacrosanct,” he said.

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