Germany avoids Europe budget fine

By Theo Leggett
Europe business reporter, BBC News

The European Commission has suspended disciplinary proceedings against Germany for breaching EU budget rules.

Angela Merkel's government is cutting spending and raising taxes

It said that Berlin was on course to bring its budget deficit - the gap between its revenues and spending - back within EU limits next year

Europe's biggest economy has broken EU budget rules for the past four years. It's something which has proved embarrassing for Germany, and infuriating for Brussels.

Under the so-called Stability and Growth Pact, member states are obliged to keep their deficits below 3% of their overall economic output.

If the limit is breached, they are expected to reduce spending or increase tax revenues in order to bring their finances back under control. Otherwise, they could face big fines.

Sluggish growth

The limits were originally put in place, somewhat ironically, under pressure from Germany.

Historically the home of tight finances, it wanted to make sure that the European single currency was not undermined by a few free-spending member states failing to keep their finances in good order.

But Germany itself has fallen foul of the rules, along with a number of other leading member states, including France and Italy.

For much of the decade, the German economy has been in relatively poor shape, showing sluggish growth at best.

So Berlin was reluctant to introduce austerity measures which it believed might have stifled any recovery, and would have proved politically indigestible.

The Commission tried to take a tough line with governments which broke the rules, but found its efforts undermined by opposition from powerful EU governments.

Instead of backing the Commission, they decided to water down the Stability Pact itself, making the rules less rigid, and allowing the deficit limits to be breached for short periods.

Higher taxes

Nevertheless, since 2005, Germany has introduced a number of significant budgetary reforms.

Among them is a plan to increase VAT from 16% to 19% next year, in order to boost government income.

Meanwhile, major cutbacks in social security programmes and government subsidy schemes have reduced spending.

The Commission says that these measures should be enough to bring Germany's deficit back below 3% of GDP next year, removing the need for disciplinary action.

But it has also sounded a note of caution. It says that further steps will be needed if the deficit is to stay under control beyond 2007.

And it has urged Berlin to make sure that planned reforms are passed into law as quickly as possible. It says it will monitor the situation carefully.

Nevertheless, for Germany, the Commission's decision is an important one.

It is now free from the embarrassment of facing disciplinary action - for breaking rules which were put into place largely at its own request.