Germany to breach budget limits

The German finance minister, Mr Hans Eichel, is under growing pressure after he admitted that Germany will not have balanced its budget by 2006 and will breach EU budgetary guidelines for a second time this year.

Mr Eichel said his budget consolidation plans had been scuppered by the economic slowdown, rising spending and a lack of structural reform, and called his failure to get Germany's finances in order a "bitter defeat".

"This year the deficit will be above 3 per cent of gross domestic product," Mr Eichel told Der Spiegel magazine, referring to the debt ceiling set down in the Stability and Growth Pact. He said Germany would need an "economic miracle" to balance its books by 2006, the date agreed by euro zone finance ministers.

The Chancellor, Mr Gerhard Schröder said: "For a 2006 budget without new debts we would need growth rates that I cannot expect."

Plans to balance the budget by 2006 were based on predictions of annual growth averaging 2.25 per cent between 2004 and 2006.

The hole in the German budget is now as large as €34 billion, according to some reports, dashing Mr Eichel's hopes of reducing debt from 3.6 per cent last year to 2.7 per cent of GDP this year.

"It is clear that we can't make it, even with €18.9 billion of new debt already accounted for in the federal budget," said Mr Eichel in an unusual media blitz this weekend designed to prepare the way for an expected dramatic drop in tax revenues to be announced on Thursday.

He declined to comment on the exact figures but said that "because of the poor economic situation the budget shortfall will be in the billions".

Slow economic growth and rising unemployment have contributed to a dramatic drop in tax takings and a massive rise in spending, which together could push Germany's debt as high as 4 per cent of GDP this year.

Berlin is already the subject of the EU's "excessive deficit procedures" following last year's breach of the 3 per cent debt ceiling.

However, Mr Eichel said he was not expecting a fine from Brussels for breaching the Maastricht criteria.

"The EU finance ministers clearly agreed in January the crossing of the [3 per cent] limit in the case of economic growth of under 1 per cent," wrote Mr Eichel in an article for today's Financial Times Deutschland. The government has reduced its 2003 economic growth forecast to 0.75 per cent while other economic institutes reckon with growth as low as 0.3 per cent.

Mr Eichel's admission that Germany will again breach the rules of the Stability and Growth Pact comes a week after the Taoiseach, Mr Ahern, made a renewed call for modifications to the pact. Mr Ahern said the pact should be modified "in a controlled way" to allow euro zone countries with low debt-GDP ratio to increase borrowing for infrastructure and capital projects.

Last month the Tánaiste, Ms Harney, made a similar call for flexibility "to maximise Europe's capacity to grow".

Mr Eichel said that Germany's economic problems are not just a result of the poor global economic situation, until now the government's standard defence, but also because of failures of the current and previous administrations.

"The causes are a lack of deep structural reform and worn-out public finances, a mistake which, among other reasons, is down to the incorrect financing of German unification," wrote Mr Eichel.

He also blamed his problems on a lack of reform of the social welfare system.

"I spend 62 per cent of the federal budget on social welfare and interest payments on debts. 40 years ago that was 23 per cent. Things can't continue this way," he told Der Spiegel.

He said that Germany's poor economic outlook meant there was no alternative to the government's plans to reform the welfare state, known as Agenda 2010. The reforms propose loosening the redundancy legislation for small companies and cuts in social welfare, pensions and health insurance but have met with huge resistance from Germany's powerful unions.

Mr Eichel's weekend remarks, and growing concerns about the stuttering German economy, will be on the agenda when euro zone finance ministers meet European Central Bank executive board members today.

The German finance minister's remarks caused a political storm yesterday, as opposition leaders accused the finance minister of electoral fraud and called for him to resign.