EU warns Germany on budget

The European Commission warned Germany today that planned tax cuts should not lead to a violation of EU budget deficit limits for a third successive year.

“The German government shouldn’t count on our support,” if that happens, said EC finance spokesman Gerassimos Thomas.

Germany’s budget deficit last year breached the 3% of gross domestic product set by EU rules. It is expected to break the limit this year as the economy struggles to avoid recession.

Repeated violations of the rules – imposed at Germany’s insistence in the 1990s to underpin the stability of the euro currency – can lead to the EU imposing fines of up to 0.5% of GDP.

However, such an unprecedented move would require the support of fellow EU governments, most of whom are also struggling to meet their budget commitments.

Fears the deficit will again break the 3% threshold in 2004 have been heightened by proposals to accelerate income tax cuts in an effort to boost the economy.

Thomas suggested the impact of such a fiscal stimulus would be limited and urged Germany instead to push forward labour market and welfare reforms to free up the economy.

“We are convinced there is no sustainable solution to public finances without a return to growth, but our conclusion is that the first priority is the implementation of the much talked about structural reforms,” the EC spokesman said in Brussels.