Germany at risk of breaching EU 3% deficit limit

The Bundesbank yesterday warned that Germany was at risk of breaching the European Union's 3 per cent deficit limit this year and has cast doubt on its chances of balancing its budget by 2004.

Mr Hermann Remsperger, the German central bank's chief economist, said the deficit was already close to the permitted limit last year with 2.8 per cent of gross domestic product.

According to Mr Remsperger: "The risk of exceeding this limit this year has grown."

He said it was also doubtful that Germany would be able to "fulfil its pledge" to bring the budget close to balance by 2004 "if there is no further cut in public spending".

Earlier this year, Germany reaffirmed its strong commitment to the 3 per cent deficit limit set out under EU Stability and Growth Pact rules to escape a public warning about its finances. It also promised to achieve a near-balanced budget by 2004.

Yesterday Chancellor Gerhard Schröder, re-elected for a second term on Sunday, insisted his government was not considering changing the terms of the stability pact.

But over the summer the German economy has stagnated and shows every sign of remaining weak for the rest of this year and next.

Most economists say it is unlikely to grow by more than 0.5 per cent this year and 2 per cent in 2003.

In a speech in Norway, Mr Remsperger acknowledged that several EU member-states were experiencing "great difficulties" in meeting budget goals.

He said the problems were due to a lack of structural reform in the euro zone, not just economic weakness.

"We need reforms that lead to more employment and growth, not changes to the stability pact," Mr Remsperger added.

Some European governments have criticised the pact rules for being too inflexible and have been looking to interpret it more pragmatically to gain room for manoeuvre.

Germany is expected imminently to send the European Commission its official deficit forecasts for 2002, with many expecting the figure to come in just below the stability pact's 3 per cent ceiling.

Meanwhile, the Commission is today expected to formally introduce a so-called "excessive deficit procedure" against Portugal, the first country to admit breaching the 3 per cent rule.

Portugal's deficit for 2001 was 4.1 per cent. And Lisbon's newly elected centre-right government has introduced an "aggressive" austerity programme to rein in borrowing. - (Financial Times Service)