Germany abandons vow to balance budget by 2006
By Bertrand Benoit in Frankfurt and Daniel Dombey in Brussels
Published: May 11 2003 20:00 | Last Updated: May 11 2003 20:00
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."
Because Germany's 2002 budget deficit was "excessive" under stability pact rules, the country is committed to reducing the structural deficit by 1 per cent of gross domestic product this year and 0.5 per cent a year thereafter. The admission by the chancellor and his minister came days after the European Central Bank failed to cut rates to boost Europe's flagship economy. It also suggested pre-emptive action ahead of tomorrow's release of federal tax estimates for this year. Leaks have suggested revenues could be as much as €12bn below expectations.
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