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Germany: Possible Warning On Deficit Leads To More Aggressive EU Stance

Germany is usually the compliant giant within the European Union. It traditionally picks up the biggest bills for EU spending without complaining too much. But now, facing a formal warning from the European Commission about the size of its budget deficit, Berlin is turning up the heat on Brussels in several ways. Is this the start of a new German assertiveness in EU affairs?

Prague, 7 February 2002 (RFE/RL) -- Germany lies at the core of the European Union. It has always been the paymaster that has financed programs benefiting mainly other members of the Union. Mindful of its historical burden, Germany has adopted a generally unassertive profile and sought to project itself as a reliable partner.

But lately, an irritated Berlin has been openly sparring with Brussels and working to thwart several key initiatives of the European Commission.

The present trouble began when EU Monetary Affairs Commissioner Pedro Solbes announced that he wanted to issue a formal warning to both Germany and Portugal, on the grounds that their budget deficits are approaching the limit of 3 percent of gross domestic product set forth in the EU's Stability and Growth Pact. Commission President Romano Prodi says the early warnings are a technicality that have to take place under the rules of the pact.

But Berlin has been lobbying hard to prevent its warning from being issued at the meeting on 12 February of ECOFIN, the grouping of EU economic and finance ministers. Reports say a group of key EU members, including Britain and France, is working with Germany to have it suppressed.

Berlin has rejected the warning as unjustified, and Chancellor Gerhard Schroeder has even suggested the Commission's motives go beyond the merely economic -- a charge hotly denied by Prodi.

In the first instance, Schroeder's chagrin can be traced to upcoming federal elections this fall.

Senior economist Adrian Ottnad of the Institute for Economy and Society in Bonn explains: "This is not good news for [Schroeder] because it is one more cornerstone broken out of the wall of his success with the economy. And with the unemployment figures becoming worse -- we are now on about 4.3 million unemployed, and [the chancellor] had aimed for 3.5 million this year -- the budget policy had been seen as one of the main pillars of stability."

Germany would be the first member state to be warned about its budget deficit. That's something of an irony, as the early warning rule was put in place at Berlin's initiative and was meant as a prod for countries like Italy and Greece, who it was thought might be tempted to overspend.

However, if the warning to Germany is successfully suppressed, it will be a heavy defeat for the European Commission. It will undermine both the authority of the Commission and the credibility of the Stability Pact. It could also cause friction between big and small members of the EU, in that Ireland last year was censured for adopting a budget that Brussels saw as inflationary. That warning caused much consternation in Ireland. To let Germany "off the hook" now would send a signal that the big boys get preferential treatment.

In addition, a row over the affair could affect the value of the new common currency, the euro. Ottnad says, "We are in a very critical situation. We are still at the beginning of EMU -- economic and monetary union -- and there are many critics who want that project to fail. So if the Commission does not show strength now, I guess there is a danger that things could, indeed, go wrong."

A second sharp disagreement between the European Commission and Germany concerns the Commission's plan to offer EU car buyers a better deal by loosening the rules under which cars are sold and distributed by dealerships. The proposed new rules would allow, for instance, cars to be sold in supermarkets or on the Internet and are designed to lower the prices of cars through competition.

But Schroeder has rejected the thrust of the plan, saying it would put German car makers at a "huge" competitive disadvantage and could cost thousands of German jobs.

An auto industry analyst with the Deutsche Bank, Christian Breitsprecher, sees Schroeder's intervention as the result of domestic political pressures.

"The [German] auto industry is against [the proposals] because it simply means a change in their present style of doing business," Breitsprecher said. "And [indeed] it will make their life harder rather than easier. And because of this, the [auto] manufacturers are exerting political pressure, and as a result the chancellor has taken up a negative position."

Breitsprecher estimates the new proposals will have a relatively moderate impact on employment. He acknowledges, however, that smaller new car dealers could be put out of business as bigger dealerships take advantage of the liberalization to expand across national borders. But he believes reaction to the Commission's proposals has been overstated.

"I hold this to be a storm in a water glass. The changes proposed by the EU are relatively moderate. [It's true] they will push forward the structural reforms, but I don't believe it will cause gigantic problems for the [auto] manufacturers."

Schroeder's stance on both these issues shows he has an eye firmly on the coming elections. Opinion polls suggest his Social Democrats are running behind the opposition Christian Democrats, and he does not want the start of the campaign marred by an embarrassing censure from the EU on the budget. Nor does he want measures instituted that could cost German jobs. As analyst Ottnad put it, "What is obvious at the present time is that Mr. Schroeder dislikes the interference of the Commission, and there is a lot of conflict."

But it is too early to tell whether this is going to lead to a more abrasive German style in general toward the EU. Schroeder and his government have their backs to the wall in view of the poor shape of the German economy, and identifying any real trend in German-EU relations will have to wait until after the elections.

The stakes are high for both sides. Just as Schroeder seeks to ward off criticism from the EU, so Commission President Prodi does not want to accept humiliation at the hands of the Germans, which would further damage his already weakened authority.