[A-List] Germany: government divisions

["Michael Keaney" <michael.keaney@xxxxxx>]

German leaders disagree over EU budget rules
By Haig Simonian in Berlin
Financial Times: June 5 2003

Apparent deep divisions within the German government over European Union
budgetary rules for the euro surfaced yesterday with a sharp divergence
between Gerhard Schröder, chancellor, and Hans Eichel, (pictured) finance
minister.

Mr Schröder signalled he was prepared to accept that Germany might overshoot
the budget deficit limit in the EU stability and growth pact for a third
consecutive year next year if that was necessary to boost growth and reduce
near-record unemployment.

But Mr Eichel said: "Germany stands by the stability and growth pact. There
is no doubt about this. Let me make this quite clear."

Mr Schröder said the pact, which underpins the euro, should not be turned
into a dogma, and that the 3 per cent budget deficit ceiling should be
upheld "to the extent that is possible". Noting the discussions under way in
his government over spending next year, he said: "In a phase of economic
weakness, one must create the impulse for growth, and that will happen in
the budget."

Mr Eichel focused on the need for tough decisions in the 2004 budget, to be
put to the cabinet at the end of this month. "It is always challenging to
keep economic and financial policy on course. We will neither tackle it
half-heartedly nor reverse our position," he said.

Economists explained the split in the context of the two politicians'
different priorities at a period of acute economic difficulty in Germany.

"Eichel is making his comments as part of the annual budget ritual," said
Holger Fahrinkrug, eurozone economist at UBS Warburg in Frankfurt.
"Schröder. . . has to convince the German people he's doing everything
possible to boost growth and cut unemployment."

However, analysts said it was extraordinary that the differences had been
allowed to emerge so fully in public.

Mr Schröder needs to be particularly sensitive to public opinion and the
mood in his Social Democratic party. He has still to ensure parliamentary
backing for controversial social and labour reforms approved by a special
SPD conference this week.

The European Commission has launched a formal procedure after Germany's 2002
budget deficit exceeded the 3 per cent ceiling, reaching 3.6 per cent last
year. This year's deficit will again exceed 3 per cent of gross domestic
product, and Pedro Solbes, the EU's budget commissioner, has warned that a
third breach would be unacceptable.