Germany Rapped By EU Commission Over Budget Deficit

by Ulrika Lomas, Tax-News.com, Brussels

20 November 2003

The European Commission finally ran out of patience with the German government earlier this week, and has initiated an excessive deficit procedure against the country for failing to keep its public debt within the guidelines set out by the Growth and Stability Pact, which underpins the single currency.

The German authorities were hoping to stave off the possibility of EU sanctions, which could involve massive fines, by implementing a flagship economic policy known as ‘Agenda 2010’, which will include tax and subsidy cuts, as well as radical labour market and welfare reforms. By introducing this plan, the government intended to shave 0.6% off its budget deficit. However, this is not enough for the Commission, which is demanding that the country reduces its deficit by at least 0.8% by 2005.

“The increase in the general government deficit in Germany in recent years is a matter of serious concern”, said the Commission in a statement. “In order to avoid the risk that the excessive deficit continues for the fourth year in a row in 2005, the Commission considers that the budgetary adjustment in 2004 should be larger than the one contained in the draft Budget for 2004.” The Commission has also stipulated that Germany channels any excess tax revenue into deficit reduction, leaving little room for manoeuvre over further tax cuts.

Reacting to the news, German Finance Minster Hans Eichel insisted that his government is keen to work with the Commission to reduce the deficit, although he repeated earlier concerns that the Pact should not restrict a government’s ability to influence growth. "We are keen to reach a joint solution, not on the basis of a financial policy which prolongs the crisis, but one which leads to a recovery," Eichel explained, adding that Germany has already taken “very strong measures” to reduce its deficit.

The Commission has requested that the German government submits its proposals in response to the deficit procedure by January 9 next year.

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