Germany warned to keep budget deficit aligned to Stability Pact

European Union finance ministers have warned Germany that it must respect the euro-zone Stability Pact by keeping its budget deficit within strict limits. The Commission believes Germany's deficit will reach 2.7 per cent next year, a level other member-states fear is dangerously close to the Stability Pact limit of 3 per cent.

Ministers meeting in Brussels yesterday declined to criticise Germany directly but the Dutch finance minister, Mr Gerit Zalm, warned that a budget deficit above 3 per cent was "forbidden territory".

Austria's Mr Karl-Heinz Grasser suggested that Germany's partners should take as tough a stance against any breach of the pact by the EU's biggest state as they did earlier this year when the Republic breached the Broad Economic Policy Guidelines. "Everyone should be treated equally," he said.

Germany's finance minister, Mr Hans Eichel, will today present a revised stability programme at a cabinet meeting in Berlin. Mr Eichel expects the German economy to grow by 1.25 per cent next year but the Commission believes that 0.7 per cent is a more realistic figure.

EU ministers are concerned that Germany's sluggish performance could delay a recovery in Europe's economy. They are increasingly impatient with the failure of Mr Gerhard Schr÷der's centre-left government to introduce reforms that many economists believe to be necessary to boost growth.

Since the end of the last recession in 1994, Germany's economy has grown by an average of 1.8 per cent each year, the lowest figure for any EU member-state. Germany's job creation performance has been poor too, with employment growing by just 3.3 per cent between 1996 and 2000.

During the same period, the number of jobs increased in Ireland by 24 per cent, in Spain by 14 per cent and in the Netherlands by 12 per cent. Until the 1980s Germany was Europe's model economy, with low inflation, relatively low unemployment and sound public finances. Economists blame an inflexible labour market and the enormous cost of German reunification for the country's poor performance in recent years.

The Commission does not expect Germany's budget deficit to breach the 3 per cent ceiling, a development that would leave Berlin open to being fined under the Stability Pact. But the Economic Affairs Commissioner, Mr Pedro Solbes, has made clear his concern about the state of Germany.