EU sees Germany on track to cut deficit, no new steps

The European Commission will not take further disciplinary steps against Germany over the country's excessive budget deficit as Berlin is on track to cut it below EU limits next year as promised, the EU executive said.
EU finance ministers have given Germany until the end of 2007 to lower its deficit to below 3 percent of gross domestic product after Europe's biggest economy breached the ceiling each year since 2002.
"On current information, it appears that Germany has taken action representing adequate progress towards the correction of the excessive deficit ... by 2007 at the latest," the Commission said in a statement. "The Commission considers that no further steps in the excessive deficit procedure of Germany are needed at present."
The EU budget disciplinary procedure against Germany is in its last stage before financial sanctions so the Commission could, in theory, recommend fines for Berlin if it was dissatisfied with the country's fiscal plans. But Berlin adopted a comprehensive package of deficit-cutting measures, including a rise in value-added tax from next year, with a view to cut its deficit to 2.5 percent of GDP in 2007 from 3.1 percent expected this year and last year's 3.3 percent.
Economic and Monetary Affairs Commissioner Joaquin Almunia, however, expressed concern that German deficit-cutting measures beyond next year were smaller than the 0.5 percent annual improvement set as a target by EU ministers.
German Finance Minister Peer Steinbrueck said last week his country might bring the deficit below 3 percent of GDP in 2006. Some economists backed that view, saying accelerating economic growth would help by boosting tax revenues.
J.P. Morgan economist Silvia Pepino forecast in a note to clients that the German deficit would fall to 2.8 percent this year and 2.1 percent in 2007.
By the same token, budget gaps in Italy and France are also likely to turn out slightly smaller than expected this year at 2.8 percent and 3.9 percent respectively, Pepino said. Almunia also said Germany may cut the gap below 3 percent this year. "This is not sure but possible," he told reporters.
Almunia did not exclude that if new data showed the deficit was corrected in a sustainable way, the Commission might end the disciplinary action against Berlin during 2007. Repeated breaches of the 3 percent EU budget deficit ceiling by Germany and France led last year to a revision of the budget rules, the Stability and Growth Pact, meant to underpin the euro.
The new pact gave budget sinners more leeway in getting public finances back in line with EU rules, but also put more emphasis on preventing deficits from growing and on taking advantage of economic good times to get back to balance.