The European Commission ratcheted up its budget disciplinary procedure against Germany today to the final stage before sanctions and gave Berlin until 2007 to cut its deficit to within European Union limits.
The Commission recommendation has to be approved by EU finance ministers. But Berlin has said it would not oppose the move, in order to bolster the credibility of the EU budget rules, the Stability and Growth Pact.
"The Commission recommends to give notice to Germany ... to take measures for the deficit reduction ... by 2007," the Commission said in a statement. Germany has breached the EU ceiling on deficits, set at 3 per cent of gross domestic product (GDP), every year since 2002 and plans to cut the gap to below 3 percent only in 2007.
But a Commission attempt to step up disciplinary action against Berlin and fellow budget sinner France was blocked in 2003 and triggered a revision of the Stability Pact in 2005, giving budget offenders more leeway in slashing shortfalls.
The Commission move brings the disciplinary procedure against Berlin up by two notches to the last stage before sanctions that could include fines of up to 0.5 percent of GDP. Greece, which has flaunted the EU ceiling since 2000, is also at this stage, but no EU country has faced sanctions yet.
Germany was the driving force behind the establishment of the EU budget rules, which underpin the euro, but then lobbied for their revision to avoid the embarrassment of having Brussels tell Europe's biggest economy how to run its finances.
Analysts see Germany as a key test for the new pact against which other budget offenders such as France or Italy would be judged and believe the tough line taken by the Commission against Berlin will set a good example.
Italy also has until 2007 to cut its deficit. The EU's executive said recently that despite significant uncertainty over whether Rome would meet that target, it recommended no further action against the euro zone's No.3 economy for now.
France, which may have brought its deficit down to 3 per cent last year, needs to take further steps to make sure the shortfall stays below the ceiling in 2006, the Commission said. Germany brought its budget deficit to 3.3 per cent of GDP in 2005 from 3.7 percent in 2004. It expects the shortfall will not change this year but will fall to 2.5 percent in 2007.