Budget-busting Germany under fire in Europe

Finance ministers from the 12 nations that use the euro stepped up disciplinary action against Germany yesterday after it broke the budget rules that underpin the common European currency for the fourth year running.

EU Economic and Monetary Affairs Commissioner Joaquín Almunia also warned ministers about protectionism, saying it was important to stress to investors that governments would stick to EU rules to keep markets open.

Germany now has until the end of 2007 to bring its budget deficit under the 3% limit set by EU rules.

German Finance Minister Peer Steinbrueck earlier said he expected the deficit to hit 2.5% this year.

He must report back on his spending efforts on July 14, when the European Commission may decide to drop disciplinary action, allowing it to chide Berlin for breaking the rules, and simultaneously praise the new government for taking action to boost the economy.

Almunia said he had warned ministers about “protectionist tendencies”, saying it was important to put across the message to investors and to consumers that Europe wanted an internal market and was not planning to erect extra barriers, especially now economic confidence was at its highest point since May 2001.

“I don’t really want that to be contaminated by some of the debates we are hearing today in Europe,” he said.

However, the chairman of the monthly eurozone ministers’ meeting, Luxembourg Prime Minister Jean-Claude Juncker, said different cases should not be lumped together.

“We shouldn’t judge all these projects in the same way,” he said. “We have to look at the industrial structure and projects which underlie the various intentions.”

Ministers decided not to take action against Italy for breaking the 3% rule. Almunia said Rome faced ”certain risks” and would be watched closely in 2006 to see if it was implementing the public spending cuts published in this year’s budget.

Both Almunia and Juncker were upbeat about the region’s economy and governments’ efforts to stick to budget rules. Domestic demand is rising in a number of countries and economic confidence is continuing to grow strongly, they said.

However, ministers analysed house prices and said they’ll come back to the subject in a few months’ time.

“There is no risk to the euro area overall. There are some member states where the situation requires closer monitoring than in the past,” Almunia said, refusing to say which countries were in danger of overheating.

House prices have risen, particularly fast in the fast-growing economies of Ireland and Spain.

Almunia said the European Commission will judge on May 16 if Slovenia can join the euro next January. He said he knew Lithuania was also planning to submit an early application but the Commission had not yet received anything.

On Greece, Almunia said he would publish a forecast for the country’s economy on May 8 after Athens submits its final budget figures for 2005, warning that this year’s figures could be altered if Greece does not win approval from the EU statistical agency Eurostat to use sleight-of-hand budgetary methods to slim down its budget deficit.

“We have to consider whether the budgetary objectives are realistic or not,” he said. “At first sight my impression is positive. The first couple of months’ revenue figures are very good.”