Germany and others warned over budget deficits, January 2003

The European Commission has announced the results of an assessment of Stability or Convergence Programmes for Germany, France, Italy, Greece, Finland and Sweden.

Introducing the assessments on 8 January, Commissioner Pedro Solbes, responsible for Economic and Financial Affairs, said he was aware of the current difficult economic situation (including, for example, a fall in consumer demand and rise in oil prices) but insisted that the 3% of GDP deficit threshold should be "untouchable":

"Overall, we remain convinced that sound public finances are the condition for durable growth and employment creation in Europe. Contrary to some commentators' views sound public finances are part of the solution to low growth in Europe and not part of the problem. Past experience has shown clearly that we cannot spend our way out of the slow down here in Europe."

Germany - at whose insistence the Stability and Growth Pact was adopted by the European Union - was singled out for particular criticism. The Commission's opinion concludes that an excessive deficit exists in Germany. The Commission now wants the Council to agree with its assessment and to address a recommendation to Germany. (This is the second step in a procedure opened in November 2002 intended to address Germany's excessive deficit).

According to the Commission, Germany's budget deficit for 2002 will have "clearly exceeded" the 3% of GDP allowed under the Stability and Growth Pact. The Commission's concern focuses on the fact that the excessive deficit was the result neither of an unusual event beyond the country's control nor of a severe economic downturn.

Rather, it was due to a number of factors, including much lower growth in 2001 and 2002 than expected and higher than anticipated public expenditure - notably on healthcare. Looking to the current year, the Commission's assessment is that the deficit will be reduced, but it cannot say whether it will meet the target 3% of GDP. Indeed, Germany's programme for balancing its budget by 2006 is, in the Commission's view, "based on a growth scenario which - would appear optimistic."

Based on its assessment, the Commission has asked the Council to recommend that Germany "put an end to the present excessive deficit situation as rapidly as possible" and has suggested the German government should take appropriate measures by 21 May 2003.

Explaining that Germany is currently "suffering very low economic growth, high unemployment and the threat of strikes by public sector workers", the BBC described the Commission's action as a "humiliation" for Germany.

(Article 104 of the EC Treaty gives the Commission power to monitor the budgetary situation in eurozone countries to ensure they are complying with the requirements of the Stability and Growth Pact. It also allows for sanctions to be taken against any Member State failing to meet its obligations. Although there is at present no suggestion that Germany will face such sanctions, actions which can be taken by the Council include asking the European Investment Bank to "reconsider its lending policy towards the Member State concerned" and imposing an appropriate fine.)

Of the other countries assessed:

• France is considered to be at significant risk of breaching the 3% threshold, "confirming the validity of the early-warning recommended to the Council by the Commission" in November 2002.

• Italy is deemed unlikely to achieve a "close to balance position" before 2004 and to have based its targets on "a macroeconomic scenario that looks optimistic".

• Greece is thought to be capable of achieving high enough growth to meet its targets of a close-to-balance position by 2005 and a debt of 87.9% of GDP in 2006.

• Finland's projected budgetary surplus of above 2% of GDP would meet the Pact requirements.

• The Commission wants Sweden to maintain tight control over expenditure to ensure that the medium-term objective of an average budget surplus of 2% of GDP is met.

Links:

European Commission:
	08.01.03:	Commission considers that an excessive government deficit exists in Germany [IP/03/12]
	08.01.03:	Pedro Solbes: Commission assessment of six Stability/Convergence Programmes [SPEECH/03/3]
BBC News Online:
	08.01.03:	Germany must slash deficit, EU rules
European Sources Online: Financial Times:
	08.01.03:	Brussels urges action on EU budget deficits

Eric Davies
Researcher,
Compiled: Thursday, 9 January 2003

The European Commission announced the results of its annual assessment of Stability or Convergence Programmes for Germany, France, Italy, Greece, Finland and Sweden on 8 January 2003.