Brussels rebuke for Germany as budget deficit nears ceiling

Germany suffered an unprecedented political humiliation yesterday, when it became the first country inside the eurozone to be given a formal ticking off over the rising level of its public debt.

The European Commission's formal recommendation of an "early warning" deals a damaging blow to the German government, which had lobbied fiercely against the move.

The warning, which will have to be approved by European Union finance ministers at a meeting on 12 February, was recommended because Germany's budget deficit is expected to rise within a whisker of the maximum allowed under eurozone rules.

Ironically it was Germany that insisted on tough regulations, the so-called Stability and Growth Pact, to control the budget deficits of the 12 eurozone countries.

In the decade preceding the launch of the single currency, Germany, traditionally Europe's economic powerhouse, argued vehemently that an austerity pact was essential to underpin the euro and to prevent economic mismanagement in any member state weakening the new currency.

Under the pact, countries must keep their annual budget deficits below 3 per cent of gross domestic product, or face massive fines. The early warning would be the first stage in an escalating process of reprimands that could culminate in Germany being fined.

Provisional figures from Germany show its deficit for 2001 was 2.6 per cent. Germany's forecast for 2002 is 2.5 per cent but the Commission projects a figure of 2.7 per cent – within a tiny margin of the ceiling.

Germany could attempt to block the warning at the Council of Ministers under majority voting rules, by mustering the support of enough countries, including France and possibly Britain. But it was unclear yesterday whether it would attempt to do so.

Diplomats pointed out that, paradoxically, the Commission had backed the policies being pursued by Germany's Finance Minister, Hans Eichel.

Mr Eichel conceded that "if someone like me, who makes such efforts at [budget] consolidation gets told this, it's not exactly overly pleasing from a formal point of view. But in truth it acts as support to our policy."

He added: "I have no problem with [the recommendation's] contents. I will do nothing that will cast any doubt on the total agreement between the Commission and the German government."

Amid reports that Germany was canvassing member states to help block the recommendation, a leading opposition figure warned that such a course would only make things worse.

Guido Westerwelle, leader of the opposition Free Democrats, said: "[Mr] Eichel would lose all credibility among his EU colleagues."

A reprimand would seriously dent Chancellor Gerhard Schröder's prospects of reelection in the German general election, due in September.

Mr Eichel conceded yesterday that Germans would have to wait until the second half of the year for any economic recovery. Meanwhile, unemployment is rising fast, and the usual remedy – a pre-election spending spree – is now out of the question.

The EU commissioner for economic and monetary affairs, Pedro Solbes, also recommended an early warning for Portugal, which has a budget deficit of 2.2 per cent of gross domestic product.