Germany to breach EU deficit rule

Mr Eichel warned Germany's finances were looking gloomy

Germany looks set to face disciplinary proceedings after warning it is likely to break European Union (EU) budget deficit limits for another year.

Official figures showed that without policy changes Germany is likely to break the EU deficit cap of 3% of gross domestic product (GDP) until 2008.

It has already broken that limit every year since 2002, and is set to unveil a deficit of 3.7% of GDP in 2005.

Europe began action against Italy on Wednesday for breaking deficit rules.

Deadline set

The European Commission (EC) gave Italy until the end of 2007 to slash its deficit to below EU limits.

Italy's deficit stood at 3.2% of GDP in 2001, 2003 and 2004, and the EC has predicted it will record a 3.6% shortfall this year - before rising to 4.6% in 2006.

The two-year time limit is a year less than Rome had hoped for and means prime minister Silvio Berlusconi will have to find an extra 10bn euros ($12bn; £6.75bn) of revenues and savings by 2007.

Germany's bleak economic future was set out by finance minister Hans Eichel at talks with the country's 16 states.

"The state of Germany's finances is dramatic," Mr Eichel warned following the meeting.

He added that the German deficit for 2006 is likely to rise as high as 3.4% - despite government plans to maintain government spending at a lower-than-planned 21.5bn euros.

Keeping the deficit in lines would instead require 30bn euros of "one-off" measures - but under new EU rules not all such measures can be used to cut deficits.

Running battle

Mr Eichel has claimed until recently that he could rein in the German deficit to 2.9% - in line with EU budget rules set out in the European Stability Pact.

The budget rulebook had been revamped after France and Germany repeatedly broke pact rules.

In December last year, the EC called a truce in its battle with the two over deficit limit breaches.

The move came after France and Germany vowed to run their budget deficits below the EU cap in 2005 - for the first time in four years.

But, the EC did warn the two were under close scrutiny and it would act if their fiscal situations deteriorated.

As a result of Mr Eichel's admission about the German budget the country now looks likely to face the same disciplinary fate as Italy this autumn.