Germany flexes might to escape euro yellow card

Germany is expected to avert a humiliating pre-election reprimand over its high levels of borrowing today after its Chancellor, Gerhard Schröder, aggressively criticised the European Commission.

Traditionally one of Europe's most ardent supporters, Germany has hardened its rhetoric against Brussels in its fight to avoid receiving the first "yellow card" for a eurozone country.

Diplomats in Brussels were trying to broker a compromise as finance ministers from the eurozone countries met last night ahead of today's gathering to decide the issue. With the support of Britain and Portugal, the German government appeared to have enough backing to block the official "early warning" over Berlin's mounting budget deficit.

The issue is seen as a test of the euro's credibility. It is also seen as a test of the Commission's willingness to stick by the single currency's rule book, the Stability and Growth Pact (SGP), which is designed to ensure governments do not spend more than they can afford.

But, facing an election in September, Mr Schröder has gone on the offensive against the recommendation from Brussels that Germany be shown a "yellow card".

Outright hostility to Europe would almost certainly be counter-productive in a German election year, so Mr Schröder's criticisms are directed not at the EU, but at its bureaucracy.

Last month, the Commission recommended that Germany be given the first "early warning" because its predicted deficit of 2.7 per cent this year is close to the 3 per cent ceiling laid down by the SGP. Ironically, Germany originally insisted on a pact to ensure southern nations did not go on huge borrowing sprees. If deficits go beyond 3 per cent, countries are subject to massive fines.

Germany says that although Brussels highlights Germany's borrowing problem it does not suggest corrective measures.

Gordon Brown, the Chancellor of the Exchequer, has promised to back Germany. He is angry at much milder criticism of his borrowing plans in a document assessing the British economy, and says more flexibility should be applied in interpreting guidelines.

Portugal, which also faces a reprimand, will oppose the Commission's recommendation, making three countries pledged to block the plan. That is short of the required blocking minority but Luxembourg, France and Spain have voiced varying degrees of opposition.

One possibility is that the text will be toned down or that Germany and Portugal are asked simply to restate their commitment to stay within the 3 per cent ceiling. Another is that finance ministers would postpone the issue while monitoring German economic performance.

But the spectacle of a fudge designed to ease the electoral plight of Mr Schröder would damage the credibility of the Commission and could weaken the euro's value.