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Sunday, May 11, 2003

EU Deficits: It's Official Germany Won't Make it For 2006

The German crisis deepens. Hans Eichel has put his cards on the table, and they don't like what he has to say. For once a politician is being asked to resign for telling the truth. In normal times this admission would bring the euro crashing down (it is after all an admission that German finances are on an unsustainable path far worse than their US equivalent), but these are not normal times, and of course it won't.

German Finance Minister Hans Eichel abandoned his longstanding aim of balancing the budget by 2006 yesterday and said the deficit would bust European Union limits again this year, prompting calls for his resignation. "We can't make it by 2006 any more, that is unless there is an economic miracle," Eichel told Der Spiegel weekly in an interview released ahead of publication today. Eichel's goal of wiping out the budget deficit by 2006, formulated in the boom year of 2000, has looked increasingly doubtful as growth in Europe's largest economy has stuttered to a near halt and unemployment has soared to 4.5 million. Eichel also said Germany would not meet the European Union's limit on public budget deficits of three per cent of gross domestic product in 2003. The deficit hit 3.6pc of GDP last year, prompting EU demands for action to get it down. Eichel rejected suggestions the deficit might even exceed 4pc this year. He said whether it would take an extra two or three years beyond 2006 to balance the budget depended on economic conditions, but he would not give up trying.

Opposition politicians said Eichel, whose reputation as a strict guardian of public finances has taken a battering of late, should step down. Christian Democrat leader Angela Merkel demanded a new start, calling Eichel weak and "burned out". Touring a market in the central town of Kassel yesterday, Eichel dismissed a report due to appear in the Focus weekly magazine that he had threatened in a cabinet meeting to quit if public finances were not brought back under control in 2004. "I may be disappointed, but finance ministers are not only there for good weather, they must also get through bad weather," Eichel told Reuters Television. The Bild daily suggested yesterday that Defence Minister Peter Struck could be in line for Eichel's job if he resigned.Eichel's admission that he will miss budget targets comes as Chancellor Gerhard Schroeder is battling trade unions and left-wingers in his Social Democratic Party (SPD) to push through a package of welfare cuts and labour reforms to try to stimulate growth and ease pressure on public finances.

As the economy has ground to a halt, Chancellor Gerhard Schroeder's SPD has slumped in opinion polls since narrowly winning re-election in 2002, with latest surveys putting the party on 27pc to 47pc for the conservative CDU.The government last week cut its official growth forecast for 2003 to 0.75pc from a previous 1pc. The European Commission has forecast German growth of just 0.4pc this year and a deficit of 3.4pc of GDP.Eichel said the Commission had accepted Germany would only meet the 3pc target if growth was at least 1pc and the government managed to push through a package of tax increases blocked by the opposition conservatives last month.

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