Solbes tells Germany, France and Italy to balance the books

Date: 09/01/03

By Peter Chapman

GERMANY and the eurozone's other budget bad boys France and Italy were this week told to get their finances in order by Monetary Affairs Commissioner Pedro Solbes.

The Spaniard issued German Chancellor Gerhard Schröder with an "excessive deficit warning" for allowing Europe's biggest economy to run a budget deficit of 3.75% of national income - way above the EU's 3% limit enshrined in the German-inspired stability and growth pact.

The embarrassing warning - similar to a missive issued to Portugal last year - must be ratified by finance ministers and could eventually lead to hefty fines if it goes unheeded.

Solbes said Berlin must ensure its parliament approves the necessary spending cuts and taxes it had already announced by May 21 - or risk further action.

To make matters worse, he said Germany also risked topping the 3% limit in 2003 unless it quickly implemented reforms intended to tackle the problem.

Germany's own assumption is that the deficit will be around 2.75% this year - but that is based on a growth forecast of 1.5% dubbed "optimistic" by Solbes.

Looking further into the future, he said the chances of balancing the budget in 2006 hinged on the successful reform of labour markets in the country - hit this week by the threat of strikes from public sector workers.

Cracking the whip elsewhere, Solbes also expressed concern about over-optimistic budget forecasts in France - where the risk of overshooting the 3% limit this year "remains large".

He noted that the French forecasts showed that the country would still show a 1% deficit in 2006, fuelled by tax cuts from 2003 onwards.

But he warned that even this figure remained conditional on tough expenditure cuts, particularly in the health sector.

If France did not act, it could be hit hard with the financial burden of greater numbers of French pensioners "as early as from 2006".

Solbes said the budget raps proved that the 3% anchor was "untouchable".

"That is why we have been equally clear in our recommendations for Germany to eliminate its excessive deficit and for France to do everything possible to avoid it," he added.

The eurozone's third biggest economy, Italy, was also told to provide more information by March, at the latest, to allay nagging doubts that Italian treasury number-crunchers are getting their sums wrong, and that the country will run into budget trouble during 2004.

Italy, which is the EU's most indebted country, was also not planning to cut its debt fast enough, he added.

Italian Treasury Minister Giulio Tremonti said his country had "the will, the time, and the means" to ensure its deficit remained below 3% next year.

The German finance ministry said it was sticking by its 1.5% growth rate prediction for 2003 - even though Solbes said it was likely to be lower.

Germany, France and Italy have been told to get their finances in order by Monetary Affairs Commissioner Pedro Solbes.