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EU: Germany Avoids Warning, But At What Cost?

  • Breffni O'Rourke

Germany, the European Union's biggest economy, has managed to avoid a formal reprimand from the European Union about its growing government budget deficit. Reports say EU finance ministers have agreed not to issue the warning at their meeting later today, after Berlin pledged to get its budget close to balanced by 2004 and not to increase government spending. But what are the consequences of this action? Will it be seen as preferential treatment for a big EU member over small members, insofar as Ireland received a similar warning last year?

Prague, 12 February 2002 (RFE/RL) -- Germany has successfully fended off the European Union's attempt to issue a formal early warning that Berlin's budget deficit is approaching the limit set in the union's common Growth and Stability Pact.

Today's meeting of EU economic and finance ministers in Brussels was to have issued the warning, which is mandatory under the technical terms of the pact. Both Germany and Portugal were to be censured, but the plan was dropped after Germany promised to come close to balancing its budget by 2004 and to curb government spending.

The compromise comes after several weeks of unusually harsh comments directed at Brussels from German Chancellor Gerhard Schroeder, who among other things compared Germany to a milk cow. That's a reference to the fact that Berlin pays by far the biggest share of the bills in the union. Such a good cow should be well treated if it is to continue giving milk, Schroeder said.

The planned warning would have been a source of embarrassment for Schroeder, who faces a difficult federal election in the fall. There is also a certain irony in the situation, as Brussels-based analyst Alexander Hobza of the Centre for European Policy Studies notes.

"It's well-known that it was Germany itself which proposed the [creation] of the pact, and in this sense it has become the country which proposed the arrangements and then tries to avoid them afterwards. Of course, that would not send good signals."

Another senior analyst, Adrian Ottnad of the Institute for Economy and Society in Bonn, says the decision not to issue the warnings will be seen by smaller EU members as unfair preferential treatment for bigger economies. Ireland was censured last year for inflationary budget arrangements. Ottnad also says it undermines the credibility of the stability pact, insofar as he does not see how Germany can live up to the commitment it has just given to the ministers.

"I am not very optimistic, First of all, with respect to the German government's reaction, the government is now telling us that it will reach a balanced budget by 2004, that it is willing to do this. [But] this is not more than simply saying it and I think it is not worth the paper it's written upon, because things have not changed in any way, and the problems with lack of sustainability in the budget are still there and I do not see how the government can reach that goal."

The analyst adds that Schroeder's harsh reaction to the EU authorities will help deepen the cracks in the pact. In Prague, a Czech analyst at the Institute of International Relations, Petr Drulak, agrees the decision will fuel resentment among smaller members.

"It seems that if the country is small, then there is no problem to reprimand it, but if a big economy gets into trouble, people are very careful not to be too nasty."

Drulak calls for a redesign of the terms of the stability pact to make it more flexible, which might help avoid situations like the current one from arising again.

"One should make more room for a flexible fiscal policy, perhaps not insisting dogmatically on numbers which were agreed, on this 3 percent budget deficit. Because once there is economic crisis -- or [perhaps] not crisis, but at any rate economic troubles -- then it may make very good economic sense to have an even higher budget deficit, with the idea that you balance the budget deficit in times of boom."

Back in Brussels, analyst Hobza is saying things on the whole are not "critical." He notes the warning in any case would only have been provisional, in that Germany has not reached the 3 percent deficit level. For that reason, he expects only limited reaction from the financial markets.

"I do not think that financial markets should react too violently to this, but of course from a political point of view, this creates a problem [for the EU] because you cannot send such a warning to anyone else, if Germany seeks to avoid the same."

And analyst Ottnad in Bonn sees what has happened as a temptation for other EU members to do the same -- namely, to relax their grip on the budget, with France being a likely country to do this. And, of course, that in turn could influence the Eastern candidate members not to take budgetary restraint seriously. In Prague, analyst Drulak takes up the same theme, but says he does not see a serious impact on the candidates.

"I would say the signal [to the accession countries] is subtle. I would call it quite a subtle signal, because it does not argue in favor of fiscal profligacy. From that point of view, I would not call it a wrong signal to candidate countries that they do not have to keep their books in order."