EU Loosens Belt, Gives German Budget Breathing Room

With Europe’s largest economies in a deficit bind, the European Commission passed a policy delaying a balanced budget deadline and giving members two extra years, until 2006, to balance their books.

The Tuesday decision by the EU’s administrative and executive arm brought relief to Germany, Italy, Portugal and France, all of whom are either in the process of, or already violating the EU’s stability pact rule that budget deficits can be only 3 percent of the country’s Gross Domestic Product.

The decision drew criticism from countries Belgium, Spain and the Netherlands, all of whom have taken domestically unpopular steps to reduce deficits.

“If next year or in 2004 the German, Italian or French budgets should again veer away from an equilbirium, I think we would not only put at risk the pact but the legitimate confidence of investors and consumers in the evolution of the European Union,” said Beligan Finance Minister Didier Reynders in a radio interview.

Europe's strongest and its weakest

The three countries make up both Europe’s biggest economies and its biggest debtors. The German ecnonomy, in particular, has been hedging dangerously close to the 3 percent limit set by the Growth and Stability Pact – which the Germans helped shape in the mid-1990s.

On Tuesday, German Finance Minister Hans Eichel, fresh off an ebullient nail-biting victory by his Social Democratic Party in Sunday’s elections, reported soberly to the Commission that German debt would reach 2.9 percent of the GDP this year. The number was 0.4 percent higher than the mark set earlier by the finance ministry.

Eichel has promised to continue on the strict savings program he initiated during Chancellor Gerhard Schröder’s first term. But economists say saving is not enough. Germany’s needs deep structural reforms to its economy.

Europe’s economies in a downward spiral

The refrain has been one that has resounded across the European Union with the rise of the globalized economy. At the moment, the European Union is finding itself facing a harsh economic reality.

The slumping world economy has prompted European economies to increase spending to provide stimulus. But spending only contributes to sluggish growth, according to a scathing report Tuesday by EU monetary affairs commissioner Pedro Solbes. As a result, the EU economies would only grow by a combined 1 percent in the coming year, 0.4 percent less than forecast.

Now, the country’s economies have until 2006 to sort out their problems, two years later than the original balanced budget deadline envisioned. But to keep major economies like Germany’s on guard, the Commission announced it expected budget deficits to go down 0.5 percent each year.

Delaying deadline could spark growth

The decision was greeted by the head of Germany’s Insitute for Economic Research.

”I see it as a must in order to save the stability pact,” Klaus Zimmerman told Reuters.

Had the EU stuck to the pact’s deadline, numerous economies would have missed the mark. The EU would then have faced a loss of faith in the Growth and Stability Pact, Zimmerman said. He also expects the decision to give a much needed growth boost to Europe’s economies, including Germany’s.