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Wednesday, 13 November, 2002, 12:09 GMT
Germany faces EU budget penalty
Hans Eichel
German finance minister Hans Eichel promises cutbacks
Germany is facing the humiliating prospect of a formal reprimand from the European Commission for breaching rules on budget limits.

We have to treat the small and large countries on an equal footing

Didier Reynders, Belgian finance minister

The Commission is to launch an excessive deficit procedure against Germany, said Monetary Affairs Commissioner Pedro Solbes, announcing the first step in a process that could lead eventually to big fines.

The news came as the Commission unveiled forecasts for feeble economic growth - just 0.8% - across the European Union in 2002, slashing its last forecast by more than half a percentage point.

In a grim assessment of the EU's economic health, it cut its forecast for growth in 2003 to 1.8%, sharply down on a prediction of 2.9% made in April.

Sluggish growth in the United States and the uncertainty surrounding the world's largest economy has sapped trade and hurt Europe, the Commission said.

Only from mid-2003 is EU growth expected to gain momentum, "if confidence returns, oil prices ease and stock markets remain stable," it said.

If all those conditions are met, the region's economy should grow by 2.6% in 2004.

Double trouble

The Commission said Germany will breach a maximum 3% ceiling on budget deficits for member states both this year and next, clocking up deficits of 3.8% of gross domestic product (GDP) in 2002 and 3.1% in 2003.

European Commissioner for Monetary Affairs, Pedro Solbes
Mr Solbes will start the punishment process

France will also come within a whisker of overstepping the limit, with budget shortfalls of 2.7% this year and 2.9% in 2003.

The French government's "safety margin for dealing with negative surprises is virtually absent," the Commission said.

Mr Solbes said France will receive an early warning notice, putting it too on the road to punishment if it fails to bring its deficit in line.

Portugal became the first country to receive a formal reprimand earlier this year after its budget deficit reached 4.1% in 2001 and faces fines that could amount to 5% of its GDP.

Portugal's budget deficit is still dangerously high at 3.4% this year, but is expected to drop below the limit in 2003.

'No privileges'

Belgium's finance minister earlier called for the Commission to take steps against Germany and France to demonstrate it does not give favourable treatment to bigger EU members.

EU economic growth forecast
2002 +0.8%
2003 +1.8%
2004 +2.6%

"Belgium is clear on one point: we have to treat the small and large countries on an equal footing," said Didier Reynders in an interview with a Belgian newspaper published on Wednesday.

Ironically, Germany was the main architect of the rule on eurozone member nations' spending.

It pushed for EU members to adopt the Stability and Growth Pact, which was designed to prevent countries such as Italy from overspending after the euro was introduced.

Many commentators have argued that the Pact is too inflexible.

'Stupid' rule

Its critics include Romano Prodi, the president of the European Commission, who made headlines last month when he called the budget rule "stupid" and "rigid".

German finance minister Hans Eichel had already admitted his country will exceed the 3% spending cap and has promised to make huge cuts in pension and healthcare provision to tackle the problem.

But the basic problem is the slow German economy.

"We will see a cautious recovery next year but it's a slow acceleration with the handbrake on," said Wolfgang Wiegard, who chairs the German government's panel of economic advisors.

The so-called "five wise men" predicted 1% growth next year after 0.2% this year, and called for structural reform.

Germany came close to receiving a formal warning in February 2002, but eurozone finance ministers backed away from endorsing the Commission's request for one.

The debate over the Pact has also thrown a spotlight on the role of the European Central Bank (ECB), which sets interest rates across the whole 12-member eurozone.

The ECB has kept rates unchanged at 3.25% for most of the year, as the German economy has weakened.

The Commission endorsed the ECB's stance on interest rates, saying current level was "conducive to growth", and echoed its inflation forecast of 2.3% this year and 2% next.

The BBC's Mark Gregory
"The fine will come next year if, as expected, Germany again exceeds its deficit target"
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