Germany Heading For Clash With EU Over Tax

by Ulrika Lomas, Tax-News.com, Brussels

26 June 2003

The German government's plan to accelerate tax cuts proposed for 2005 has met with a hostile response from the EU Commission which fears the country will breach eurozone stability rules for a third consecutive year.

Recent reports have suggested that the EU monetary affairs commissioner, Pedro Solbes, will be prepared to turn a blind eye to Germany's breaching of the Growth and Stability pact for a third year by allowing its deficit to remain above 3% of GDP so that tax cuts go ahead a year earlier than planned.

Solbes himself, however, has refuted such a suggestion and recently stated: "The German government should not count on support by the Commission if their budget proposals are not compatible with the fiscal rules." Though the Commissioner was sympathetic to Germany's economic plight and need for stimulus, he added that such measures were unlikely to provide long term growth and asserted the country's "first priority should be the implementation of the much talked about and long overdue structural reforms, including pension and healthcare reform."

Nevertheless, German officials remain convinced that the EU will allow Germany to breach its deficit obligations next year if the country shows evidence of progress with structural reforms. "We're confident the Commission will accept this," said a senior official to the FT. "First, we would stress the big and long term impact on public finances. And then, as far as the credibility of the stability and growth pact is concerned, we feel there are no real grounds for fears: after all, it's not as if the euro is wobbly at the moment."

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