BRUSSELS, Feb 9: With last week’s European Commission early warning shot on Germany’s rising budget deficit still echoing across Europe, eurozone finance chiefs, meeting in Brussels next week, face an agonising choice between politics and principle.
Many in the 12-nation currency bloc are eager to come to the aid of an increasingly vulnerable German Chancellor Gerhard Schroeder who faces unexpectedly tough elections in September.
Betraying an unusual nervousness, Schroeder this week lashed out at the Commission move, saying he was convinced there were political, not economic, reasons for the unprecedented reprimand.
As Commission officials fiercely denied harbouring any ulterior motives against Berlin, new figures showing an upsurge in German unemployment figures beyond the politically sensitive four-million mark in January added to pressure on Schroeder from the conservative opposition leader Edmund Stoiber.
France and Portugal appear to be tilting in favour of Berlin. Germany is also expected to win support from Britain which although not in the eurozone will take part in the discussions in Brussels on February 12 as a member of the European Union.
But some eurozone governments and key policymakers say upholding strict rules set by the eurozone’s growth and stability pact is more important than healing the German leader’s wounded pride.
Eurozone finance ministers must formally endorse the Commission’s early warning on Germany to ensure eurozone credibility and strengthen the reputation of the euro, European Commission President Romano Prodi said recently.
“Rules have to be obeyed so that the euro and our economies are both protected,” Prodi told reporters.
“An early warning is necessary when a country’s budgetary deficit is approaching the 3 per cent limit” set by eurozone regulations, the EU chief said. The warning did not mean that Germany was being censured for adopting a wrong economic course.
Independent analysts are equally adamant: a failure to rebuke Berlin on its expected 2.7 per cent budget deficit in 2002 will be construed as weakness by financial markets across the globe.
“A pro-German alliance will undermine the credibility of European Monetary Union and provide another excuse to thrash the already vulnerable euro,” warns Nomura’s European economist Adolf Rosenstock.
“If the eurozone growth and stability pact is allowed to flounder at its first test, what good is it?” asks Rosenstock.
European Monetary Commissioner Pedro Solbes, who made history last week by proposing that Germany be publicly rebuked, is equally sure that he has chosen the correct course.
Failure to reprimand Germany would have laid the Commission open to allegations of favouritism and even political cowardice vis-a-vis the eurozone’s economic powerhouse, say aides to Solbes.
If eurozone finance ministers fail to take action in the “clear-cut” German case, it is difficult to see when an early warning could ever be issued, Solbes warned.
Germany’s outrage is hardly appropriate anyway, adds Rosenstock. “This is just a verbal warning, with the Commission telling Germany to watch out because danger could be lurking in the future,” he says.
The Commission has been careful to sweeten the impact of its rebuke by insisting that Germany has “so far” pursued the right economic course.
The Commission’s message is that German Finance Minister Hans Eichel’s 2002 budget should be implemented as planned. There is also understanding in the currency bloc that the German budget deficit is the result of a slowing world economy, not incorrect economic policies.
Under pressure from the opposition to expand spending and cut taxes, Schroeder could in fact use the Commission early warning to fight opposition demands for changes in economic policies, says Rosenstock.
But the Chancellor appears to be in little mood to listen. One reason is clearly that Schroeder has made fighting Germany’s high unemployment a priority of his term in office saying his Social Democrat-led government should be judged at this year’s election on its handling of the jobs market.
But economists are forecasting only a moderate pick-up in German economic growth this year, which they say will not be enough to result in a major turnaround in the labour market before Germans go to the polls on September 22.