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Tuesday, June 24, 2003

The German Battle Looms

My feeling is that nothing about the present German crisis is going to be simple, and this news confirms my impression:

Gerhard Schr?der, German chancellor, was on Tuesday heading for a showdown with the European Commission over his plan to boost the German economy by bringing forward tax cuts. Pedro Solbes, EU monetary affairs commissioner, warned Mr Schr?der the proposals could breach Europe's budget rules and urged him to focus on reforming pensions and healthcare. Mr Solbes has been irritated by reports from Berlin that he would endorse the personal tax cuts even if it meant Germany breaking the EU's stability and growth pact for the third successive year in 2004. "The German government should not count on support by the Commission if their budget proposals are not compatible with the fiscal rules," he said. He could recommend heavy fines or other sanctions if Germany's budget deficit exceeds the stability pact's ceiling of 3 per cent of GDP in 2004. The Munich-based Ifo institute on Tuesday highlighted Germany's economic problems when it lowered its 2003 growth forecast for the eurozone's biggest economy from 0.5 per cent to zero. Ifo warned unemployment would rise further, increasing the burden on state finances. It said the jobless rate would average 10.4 per cent this year but rise to 10.8 per cent in 2004, the highest since reunification. As the economic problems crowded in on Mr Schr?der, the European Commission suggested his plan to bring forward unfunded tax cuts was ill-conceived.
Source: Financial Times

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