Germany looked set to avoid an embarrassing European Union reprimand over its ballooning budget deficit, but analysts say that may be bad news for the weak euro down the road.
The EU's single currency has been appreciating in recent days to a two-week high of almost 88 US cents today despite bickering between Berlin and the EU over whether to issue what would be an unprecedented rebuke.
Germany's budget deficit compared to the size of its economy is nearing the 3 per cent cap required of nations that have adopted the euro as their currency.
Germany's budget woes have already been factored into the market, market sources said. Optimism about prospects for Europe's economic recovery coupled with worries over the energy trading firm Enron's collapse in the United States were pushing the dollar down and the euro up.
Yet analysts warned a move enabling Germany, Europe's biggest economy, to escape a formal warning at tomorrow’s meeting of EU finance ministers could undermine confidence in the euro's fiscal underpinnings and prolong its weakness.
"It's extremely bad news and extremely stupid," said Mr Wolfgang Hager at the Centre for European Policy Studies in Brussels.
European Central Bank president Wim Duisenberg also reiterated his support for the European Commission's recommendation to send an "early warning" over the weekend.
Ironically, the commission seeks to enforce rules the Germans themselves insisted upon when the single currency was in the planning stages in the 1990s.
Those rules require countries not to allow their budget deficits to go above 3 per cent of gross domestic product. Due to an unexpected recession, Germany's is estimated to reach 2.7 per cent this year.
The commission argues it is just following the rules of the treaty. But German Chancellor Mr Gerhard Schroeder, facing a tough re-election battle this year, decided to fight it.
EU diplomats, speaking on condition of anonymity, said they expected a face-saving compromise to emerge from a meeting of euro zone finance ministers today night that would be adopted by the full group tomorrow.
PA