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Monday, May 12, 2003

More On the German Deficit

The political crisis in Germany continues unabated. As I look from my window what strikes me as curious about the panorama (strikes in France, damaging admissions in Germany) is that in a normal world this would all be extremely euro-negative. But the euro continues its rise. Of course the 'diplomats' down at the Commision are leaving no stone unturned in the effort to tell us that two plus two does in fact equal five, and that the stability pact is not being breached. All of this should give a measure of how far from normality things have gotten, and give all of us a lot of cause for thought.

The German government, battling to cut spending and avoid recession, on Sunday dropped its pledge to balance its budget by 2006, adding strain to the eurozone stability pact. Chancellor Gerhard Schröder and Hans Eichel, the finance minister, conceded defeat in two separate interviews, saying Germany's depressed economic growth made the goal, formulated three years ago, unattainable. Mr Schröder told the Berlin newspaper Tagespiegel: "A balanced 2006 budget would require growth rates that I cannot expect and if achieving this meant cutting spending as much as revenues are falling, or giving up the 2005 tax reform, I would not be ready for it." Mr Eichel admitted for the first time that the deficit would be above the stability pact's ceiling of 3 per cent of gross domestic product this year. The ministry later said it would fall below the limit next year, but denied reports that Mr Eichel had threatened to resign if fellow ministers failed to agree to drastic spending cuts in 2004. The twin admissions could further dent confidence in the stability pact, initially designed to keep fiscal profligacy in check within the eurozone, after France admitted it would rack up two consecutive deficits in excess of 3 per cent of GDP. But a European Commission official said Germany's decision to drop the 2006 target did not mean it would necessarily breach its commitments under the pact, which is concerned with the underlying budget balance, rather than its nominal level. "What is crucial is that they continue the plan to improve the structural deficit," he said. "It is also very important that they don't have a deficit of more then 3 per cent in 2004."

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