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Leader
Monday March 21, 2005
The Guardian
Few will take pleasure from worsening unemployment in Germany which led to last week's fresh instalment of corrective measures. They include plans to cut corporate taxes from 25% to 19%. This will be financed in a Gordon Brown-ish way by closing of tax loopholes so as not to worsen the country's budget deficit, which has exceeded the Maastricht ceiling of 3% of gross domestic product for three years. The latest package - a response in part to increased competition from the low tax rates adopted by the countries of eastern Europe that have recently joined the EU - is unlikely by itself to cure the country's growing economic woes. But it is another step in the right direction. The tax only affects bigger corporations, since smaller ones pay income tax. Unemployment in Germany has risen to 12.6%, or 5.2 million people, the highest level since the 1930s. While much of it is concentrated in the former East Germany - where the rate is 30% in some parts, despite a massive injection of resources by the federal government - it has reached as high as 20% in parts of the Ruhr, the heartland of Chancellor Gerhard Schroeder's Social Democratic party.
Germany is by no means a basket case. It is the still world's biggest exporter, partly because its premium engineering goods have avoided the debilitating effects of a strong euro. As a result, it has a bumper trade surplus of $196bn (compared with Britain's deficit of $106bn) and its citizens save a high proportion of their earnings. That is part of the problem. If they saved less and spent more, then the lack of consumption that has dogged the economy might start to correct itself.
But in troubled times, the understandable psychology is to save for the future. In an ideal world Germany would lower interest rates, as Britain did, to stimulate the economy. This should be bolstered with further labour market reforms to promote growth. But Germany does not control its interest rates any more. The European Central Bank does and the government is reluctant to lower taxes when Germany is under EU pressure to cut borrowing to below the onerous 3% ceiling laid down by the Maastricht Treaty. If Germany wants to raise its economic growth rate to a level that would start to cut unemployment, then it must look to the ECB for a lead in reducing rates. If the ECB could help restore growth in Germany, Europe's biggest economy, then the rest of the EU would soon feel a warm glow that is badly needed as the voting on a new constitution gets underway.
-20.03.2005
Germany Leads Pack of Pact Assassins
http://www.dw-world.de/dw/article/0,1564,1523787,00.html
Germany, one of the main architects of the EU's Stability and Growth Pact, heads a list of potential assassins who want to kill off the bloc's tattered fiscal rules.
In a remarkable twist of irony as EU ministers prepare to gather in Brussels this week to talk about reform of the Stability and Growth Pact, the main architect Germany is a leading voice in calls for the tattered fiscal rules to be taken apart.
Shackled by low growth and crippling high unemployment, the euro zone's biggest but worst-performing economy has effectively found itself caught in a trap of its own making.
Originally designed in 1997 by then German finance minister Theo Waigel to prevent spendthrift economies from hitching a free ride on the coat-tails of standard-bearers of financial rigor such as Germany, the pact stipulates that no euro zone country is allowed to let public finances run too deeply into the red.
The pact sets a limit on each country's public deficit of 3.0 percent of gross domestic product (GDP), while overall debt is not allowed to exceed 60 percent of GDP. Countries are expected to head for public surpluses in times of growth. Breaches of the limits are to be punished with stiff financial penalties.
Reality shows a long list of repeat offenders
So much for the theory.
In reality, nearly half the EU's 25 members have since run up so-called excessive deficits, with France and Germany topping the list of offenders.
Indeed, the euro zone heavyweights' deficit ratios have been well above the 3.0-percent limit for the past three years and there is every indication that, with growth expected to remain sluggish at best, they will break the rules again this year.
While smaller euro zone countries have swallowed the pact's bitter medicine and managed to get their finances in order, laggards France and Germany have long campaigned for a softening of the rules.
They want special mitigating factors to be taken into account when evaluating the state of a country's public finances, with Germany particularly vocal in arguing that the astronomic costs of unification and its massive net contribution to the EU budget form part of the equation.
Generous Germany on the ropes
Germany has ploughed hundreds of billions of euros into unification and is the biggest net contributor to the EU budget. But the euro zone's biggest economy also narrowly escaped its third recession in four years at the end of last year and unemployment in Germany currently stands at a post-war high of 5.2 million or 12.6 percent of the population.
And even current Finance Minister Hans Eichel, who originally presented himself as an iron-fisted and merciless cutter of costs and public-spending, now argues that tightening Germany's purse strings will only make matters worse. It seems to be Germany's intransigence that is the main hurdle to EU-wide agreement being reached on a reform of the pact, analysts said.
"The sticking point seems to be Germany's insistence that some allowance should be made for unification costs and the net contribution to the EU budget," said Dresdner Kleinwort Wasserstein economist Anthony Thomas in an interview with AFP. "Although the German government is unlikely to be permitted such clear allowances, the question is whether finance ministers or government chiefs will be able to come up with appropriate wording to satisfy all parties," Thomas said.
There was no sign Friday of the stalemate being broken. In fact, both sides appeared to be digging their heels in.
Pact struggles divide the European Union
Austrian Chancellor Wolfgang Schüssel insisted that the stability pact should be applied to the letter, while five big member states -- namely Germany, France, Italy, Spain and Britain -- had reportedly reached tacit agreement to block what they deemed to be an all too mechanistic or rigid implementation of the rules.
Addressing a press conference in Schüssel's home city of Vienna on Friday, German Chancellor Gerhard Schroeder said Berlin was not pushing for a modification of the pact "but an interpretation that makes economic sense".
"We want an interpretation that takes into account both stability and growth," the German leader added.
Optimism remains despite sharpened knives
Luxembourg Prime Minister Jean-Claude Juncker, whose country currently holds the EU's rotating presidency, downplayed the lack of progress. "If we don't reach an agreement on Sunday it will not be a catastrophe. It will not prevent us finding an accord at the summit."
As things stand, it looks as if a general list will simply be drawn up of factors justifying an excessive deficit. And "the danger is that the list could be so vague that it could be used to justify any overrun," Thomas said.
In the end, the choice facing EU leaders would be to hold on to a stability pact that effectively remains suspended in its current form "or to reform it so that it is virtually toothless", the economist said. "So it won't really matter whether agreement is reached or not, at least for the moment," Thomas concluded.
