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Tuesday, July 01, 2003

The Storm Over Germany's Tax Plan Continues

And now some more reaction to Hans Eichel's plan to bring forward tax cuts: the growth and stability pact is effectively suspended.

Europe's budget rules were facing their biggest challenge on Monday, in the face of Gerhard Schröder's plan to press ahead with tax cuts despite Germany's yawning budget deficit.The European Commission warned that Mr Schröder's strategy was risky and economists claimed the EU's stability and growth pact had in effect been suspended.....

But there is a growing sense among EU policymakers that the risks of deflation are more significant than the dangers of violating a pact that Germany helped to design. Pedro Solbes, EU monetary affairs commissioner, travels to Berlin on Tuesday for talks with Hans Eichel, German finance minister, to discuss the decision to cut income taxes by an extra €15.5bn next year. Mr Solbes's spokesman said Brussels acknowledged Mr Eichel's promise to find savings to fund the cuts, but added: "There are risks to this scenario."

Germany's support for tax cuts as a means of relaunching economic growth was welcomed in France. A senior member of the French government said the move would make it easier to pursue President Jacques Chirac's year-old electoral pledge to cut taxes despite France's own widening deficit. But many smaller countries that have cut spending to comply with the pact are alarmed by the apparent ability of Germany and France to breach it. José Manuel Dura~o Barroso, Portuguese prime minister, said recently: "When we sign a pact, we have to respect it."

"If anything, these latest developments act as a signal that the pact, as it stands now, will not last long. It is likely to be substantially revamped in due course," said Jacques Delpla of Barclays Capital. Officially, Berlin and Brussels say Germany will bring its deficit below 3 per cent of GDP next year, thus averting a crisis in the stability pact. But that forecast is based on GDP growth of 2 per cent in 2004 - way above consensus forecasts of 1.5 per cent.
Source: Financial Times

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