EU eyes German budget deficit

Germany could be breaching the criteria of euro-zone membership

Finance ministers from the European Union will meet in Brussels on Tuesday, for the last time before the introduction of the euro as a cash currency across the 12 countries of the eurozone.

On Monday, finance ministers from those twelve countries met separately, with Germany's growing budget deficit at the centre of their concerns.

At that meeting, the 12 finance ministers agreed to submit their 2002 budget plans by December 15, so the European Commission can draw up a report for the whole area in January.

Under the "stability and growth pact," countries in the eurozone cannot run budget deficits larger than 3% of GDP - a limit that Germany could breach if its economy goes into recession.

In principle, eurozone finance ministers could criticise or even fine a country that exceeded that target.

But that will only come after Germany submits its revised plans to the EU.

"Before we can say something...we must wait for the proposal of Germany and for the European Commission," said Belgian Finance Minister Didier Reynders, the president of the group.

Earlier, ministers expressed veiled criticism of Germany.

"Bigger countries have really not consolidated their budgets as committed in their stability programmes," Austrian Finance Minister Karl-Heinz Grasser commented to reporters.

But Economic and Monetary Affairs Commissioner Pedro Solbes was more reassuring.

He said that while most of the EU countries have shown "some slippage" from their budgetary targets, "that doesn't mean cause for great alarm" because none were in danger of having a budget deficit above 3% target.

Tax row

Meanwhile, a long-standing row over the taxation of savings threatened to erupt again at the Ecofin meeting of finance ministers.

The problem arises from a proposal to harmonize tax rates on savings throughout the EU, in order to prevent tax evasion.

Under a deal agreed in July, EU states would exchange information about cross-border savings accounts.

The three countries which have strenuously objected to divulging banking information - Austria, Belgium and Luxembourg - would be granted a seven-year transition period under the proposal, during which they could impose a 15% withholding tax instead.

But now those countries also want agreement that non-EU members like Switzerland would also be subject to the same provisions, fearing that otherwise savings would flee across the border.

German problems

Meanwhile, the depth of Germany's economic problems is likely to be revealed by the latest set of unemployment figures on Wednesday.

The German finance minister, Hans Eichel, has admitted that growth could be as low as 0.75% next year.

The German cabinet will also meet to approve the country's updated budgetary stability programme on Wednesday.

This programme foresees a "possible alternative scenario in case... the economy gets worse", the German finance ministry confirmed.

The government is expected to revise down its estimate for economic growth to 1.25% next year, and to raise its estimated budget deficit to 2.5% of GDP.

The European Commission, which assumes the German economy will only grow by 0.7% in 2002, has forecast the country's budget deficit rising next year to 2.7% of GDP.

Officially, Germany has promised to achieve a balanced public budget, which comprises the federal, regional and municipal budgets, by 2004.

But with unemployment in Germany rising inexorably higher and growth prospects growing dimmer by the day, economists doubt whether Berlin will be able to stick to its self-imposed regime of budgetary rigour.

With parliamentary elections looming next year, rising unemployment could jeopardise the government's chances of re-election.