The European Commission yesterday demanded that Germany should make extra efforts to reduce its budget deficit in order to comply with the European Union's Stability and Growth Pact.
The Commission decided that, while it was unrealistic to expect Germany to get its nominal budget deficit beneath 3 per cent of GDP during 2004, it should still be asked to reduce its cyclically adjusted deficit by 0.8 per cent next year and by at least 0.5 per cent in 2005.
The proposal, announced in Strasbourg by Mr Pedro Solbes, the European Commissioner for Economic and Monetary Affairs, came after prolonged discussion within the college of commissioners. But Mr Solbes said the proposal had been backed by "a clear majority" adding that, "the debate was very long and very good".
Yesterday's decision means the Commission is on a collision course with the euro-zone's two biggest economies, in a struggle that many observers believe will kill off the Stability and Growth Pact.
The Commission's formal proposal will be put to the council of EU finance ministers meeting in Brussels next Tuesday, when it will be considered along with the Commission's earlier proposal that France should be asked to take further action to reduce its deficit.
The Commission forecasts that Germany's budget deficit will be 4.2 per cent this year and 3.4 per cent next year.
Mr Solbes said he was not persuaded by arguments from German Finance Minister Mr Hans Eichel that additional measures either to raise revenue or cut spending would be "inappropriate" at this stage. The German government wants to make tax cuts to stimulate growth.
Mr Eichel has been arguing that the EU would be wrong to step up the excessive deficit procedure when Germany has been co-operating with the Commission and Ecofin. He said the pact would be weakened if it were interpreted "as a purely mechanical procedure".
Mr Eichel blames the increased deficits on weaker-than-expected growth and says that the German government's reform programme, Agenda 2010, will bear fruit in the medium to long term.
Mr Solbes said he had taken into account Germany's lower-than-forecast growth in 2003. The Commission expects the German economy to stagnate this year. He said he fully supported Agenda 2010 but said economic growth would not come through high deficits. He said he was obliged, under the terms of the pact, to demand further action.
The stage has now been set for a showdown over the pact, with France and Germany expected to resist the Commission's demands for further action.
The Commission's recommendations require approval by two-thirds of the votes of euro-zone countries, excluding the state concerned, but only Austria, the Netherlands and Finland appear to be backing the Commission.
The Republic's position is not yet clear and the Minster for Finance, Mr McCreevy, said this week that Germany has gone to "extraordinary" lengths to bring its deficit in line with EU rules, and he expressed "sympathy" for his German counterpart. Mr McCreevy added that France has only recently started paying "sufficient" attention to the pact.
"France and Germany are major drivers of European economic activity, so we don't want to create the situation that would make things worse economically in Europe," he said.
