Germany set to breach stability pact yet again

Germany may breach the Stability and Growth Pact in 2005 for the fourth year in succession, according to the finance minister, Mr Hans Eichel.

He said that, while Berlin remained committed to the pact, he "cannot rule out" that Germany will present a 2005 budget that will breach the ceiling of 3 per cent of gross domestic product.

His admission prompted Dr Michaele Schreyer, the EU Budget Commissioner, to remind Berlin that it had "committed itself to policies that bring the new deficit under the 3 per cent mark".

"I will do everything so that we bring Germany once again under the 3 per cent deficit mark at least by the end of next year, as agreed with the European partners," said Mr Eichel to the Süddeutsche Zeitung newspaper.

"My goal remains to hold to the promise made to our partners. But we also need freedom to organise our policies so they do not reduce the value of an upswing," he said, repeating the oft-heard Berlin mantra that there can be no budget consolidation without sufficient growth.

A finance ministry spokesman said yesterday: "The initial budget presentation will likely breach the 3 per cent ceiling but, until the end of the year, there remains a lot of time to improve on that."

The admission of another likely breach of the stability pact will be unwelcome news in other European capitals that have adhered to the euro zone rules despite budgetary difficulties. It also marks the latest in a series of humiliations for the German finance minister, once affectionately known as Iron Hans for his steely resolve to balance the German federal budget by 2006.

But this Thursday's budget estimates are expected to show a €6 billion shortfall in this year's calculations and a gaping €21 billion hole next year, according to Der Spiegel news weekly.

Little affection remains for Mr Eichel, especially among fellow cabinet members, with whom he has frequently clashed in recent weeks. They rejected Mr Eichel's proposal last week for a VAT rise to fill the budget gap and instead favour an increased budgetary flexibility they hope will encourage consumer spending and stimulate the economy.

Chancellor Gerhard Schröder dismissed as "absurd" reports that the government was planning to abandon austerity measures to pursue a new deficit spending drive and said that newly announced spending on research and education would be paid for by subsidy cuts.

German newspapers have been writing and rewriting Mr Eichel's political obituary for weeks now. But a government spokesman yesterday denied rumours of an imminent cabinet reshuffle that would eject him.

However Mr Eichel reportedly warned his colleagues at a cabinet meeting last week: "The savings course will be held. If that were different, then I would no longer take part."