Germany shows up pact’s shortfalls
Predicting the future requires more luck than skill - this applies as much to economists as it does to tabloid astrologers. But when the strength and reputation of an entire political union rest on the consequences of getting it wrong, there is cause for concern.
During the past year there has been a frenzied look at budget deficits across the eurozone, and an assessment of countries in danger of breaching the 3%-of-GDP limit stipulated by the Stability and Growth Pact. In an eager attempt to disguise the true size of budget deficits, governments have been wildly overestimating GDP growth.
Germany is a good example. Its budget deficit is expected to breach the pact's target - estimates by Barclays Capital range between 3% and 4% of GDP - and public spending is high and set to rise further in the wake of recent flood damage. To compensate, the German government has decided to postpone tax reforms, a measure expected to yield ¤3.5 billion for the federal government, and ¤3.6 billion for the regional governments.
There are other options in financing flood repairs too. If the opposition CDU/CSU coalition wins the September election, it proposes to scrap the delays to tax reforms and dip instead into the coffers of the Bundesbank, whose annual profit amounted to ¤11.2