Germany breached the EU’s budget deficit limit of 3% of GDP over the first six months of this year and will almost certainly break the terms of the European stability pact that underpins the euro for the third year in a row. In fact, the government managed to run a 4% budget deficit over the first half of this year, slightly higher than the 3.9% for the end of 2003, federal statistics office Destatis revealed last month.
Under the terms of the Maastricht treaty, eurozone members are supposed to keep their deficits below 3%, but weak growth and stalled reforms have left the German government desperately short of money.
Dieter Vesper, senior economist with the German Institute for Economics, says: ?Government spending barely increased hence the deficit increase is essentially a revenue problem. The weak recovery of the economy combined with tax cuts has lowered the tax revenue.?
Exports are offering some buoyancy but recovery is being hurt by continually falling consumer demand at home. The government was hoping the economy would grow by a little over 1% this year, but even this is being threatened by soaring oil prices.
GDP expanded by 0.5% in the second quarter of 2004, slightly faster than the 0.4% clocked up in the previous three months. However, economists say the growth is lopsided and all the gains were from better than expected exports, up 3.2% in April to June.
On the other hand, consumer spending, the largest part of the German economy, continues to fall: consumers spent 0.1% less in the second quarter after spending already fell 0.8% over the first quarter of this year, according to Destatis.
The general pessimism is also hitting Germany’s companies as fixed investment declined by 1% in the second quarter and hit the construction sector especially hard.
The inability of Europe’s biggest economy to rein in its deficit has European central banks worried and might yet threaten the stability of the euro. Berlin pledged to bring the deficit back within the 3% limit by 2005, but now experts are sceptical the deficit is getting bigger each year, not
smaller.
The issue has already sparked a mini-crisis in the EU. Italy and France are in the same boat as Germany and facing the ire of the smaller EU countries. The EU council of ministers decided last November to let Berlin and Paris off the hook, incensing smaller countries, which have made painful cuts to stay within the Maastricht limits.
Cut to the bone
It now looks as if Berlin has run out of room to manoeuvre. It has already cut spending to the bone and Bundesbank president Axel Weber says that another e7 billion will have to be shaved off public spending if the government is to have any chance of bringing the deficit below 3%.
Continued reforms are crucial to recovery, the OECD said last month, but the government got off on the wrong foot when plans to slash social security payments brought tens of thousands onto the streets in protest. The government wants to cut benefits for the long-term unemployed to subsistence levels from the start of next year. Overall, one in 10 Germans are unemployed and in the east unemployment is 18.5%.
Messing about with Germans’ social support system is political dynamite. About 80,000 people took to the streets in a series of Monday demonstrations to protest against the cuts. Organizers drew comparisons with east German pro-democracy demonstrations in 1989 that contributed to the fall of the Berlin wall and promised to continue the demonstrations until the government withdraws the changes to social payments.
?Everyone says that the economy is not working but we ask if that is true. Germany is one of the strongest exporters in the world. The question is who should the state serve, the people or the businesses? Germany has enough resources to pay for its social system,? says Sacha Kimpel, a spokesman for the demonstrators. ?Like in 1989 there is a gap between the people and the government. Then we were protesting against a dictator, which isn’t the case now, but the gap has become very wide.?
Stuck between a rock and a hard place, chancellor Gerhard Schröder has to push on with reforms that could cost him his job. The reformed communist party, the Party of Democratic Socialism (PDS), has overtaken the ruling Social Democrats in eastern Germany to become the second most popular party after the conservatives, who were 20 points ahead of the SDP in recent polls.
Political commentator Richard Schröder, a theologian and former member of the SDP party, says: ?West Germany needed reform long before 1989 but it was put off because of unification, which created new markets and so masked the need for change. Now we have long passed the point where it is possible to reform the country without a great deal of pain.?
