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Business

Solbes Blames Reunification for German Economic Woes

Europe’s Commissioner for Monetary Affairs warns that Germany is in danger of breaking euro zone rules again in 2004 and 2005, but concedes that the problems have been fueled by the merging of East and West Germany.

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The EU economy will recover slightly in 2004, but no end of the misery is in sight for Germany.

Germany’s weak growth remains a serious problem for the European Union. Not only will Germany break the EU’s deficit spending cap of three percent in 2004 for the third time in a row, it will also lag behind the rest of Europe in economic growth.

In his latest report released on Wednesday, Pedro Solbes said he expected the EU’s total economy to grow by 1.8 percent in 2004. However, Germany will only attain growth of 1.6 percent during that period. According to the commissioner, limited gains in Germany, the EU’s largest single economy, will also put a drag on growth throughout the euro zone.

"There was, this year, one big country, Germany, which had very weak growth. We know the causes - among them the costs of reunification," he said. "There is also weak growth in Italy, but above all we see the problem in Germany and France."

The Commissioner's admission that the reunification of East and West Germany has contributed to economic woes is likely to take some pressure off of the federal government in Berlin. Previously, the Commission had blamed the country's restrictive labor market, high unemployment and inability in recent years to push through needed structural reforms for the swollen deficit.

Solbes’ forecast noted that Germany is not expected to fully profit from an forecasted upturn in the EU economy next year. He also expects the country’s unemployment rate to continue rising into 2005, a trend that will lead to expensive social outlays that will make a balanced budget difficult and decrease confidence among consumers and businesses. Germany’s tight budget is also leading to a reduction in public investment, he warned.

Brussels calls for reforms

Noting Berlin’s dire economic situation, Solbes encouraged Germans to push through an ambitious package of structural reforms now working its way through parliament and the country’s upper legislative chamber. Only with the passage of structural reforms will German be able to bring its budget in line with the Stability and Growth Pact, which guarantees the secure course of the euro, Solbes cautioned.

For next year, the EU is forecasting a German budget deficit of 3.9 percent of gross domestic product, a figure that far exceeds the three percent permitted under the European stability pact. The German government recently conceded that its budget deficit for 2003 would exceed four percent.

"We assume that, despite their efforts, France, Germany and Portugal will continue to break this reference value," Solbes said.

The EU report also warned that Italy is also on track to violate the deficit limit in 2005. The Commission said it was also concerned about the Greek and Dutch budget positions.

Key leaders call for easing of pact

Euro zone member states introduced the Growth and Stability Pact as part of the Maastricht Treaty in order to ensure the stability of the common European currency, the euro. More recently, the viability of the pact, crafted by German and France, has come into question.

Just last week, Italian Prime minister Silvio Berlusconi said the three percent ceiling should not be seen as "an absolute" restriction. Berlusconi's statement echoed previous calls in recent months by German Chancellor Gerhard Schröder and French President Jacques Chirac for a looser interpretation of the Stability Pact.

Solbes, however, insisted that the EU would not stray from the Stability Pact.

"The Commission doesn’t have any intention of changing the pact. We want to maintain it as it is," he said.

By breaking the Stability Pact for a third consecutive time in 2004, Germany could face serious consequences, including billions of euros in penalties, though the Commission has not indicated it would push for such grave action.

Next Tuesday, the European economic and finance ministers will determine which, if any, penalty measures are to be taken.