The European Commission, the executive body of the European Union, has asked EU finance ministers to warn Germany and Portugal that their budget deficits are nearing unacceptable limits. The move is unprecedented and surprising in the case of Germany, which has always been a staunch proponent of tight budgets.
EU Monetary Affairs Commissioner Pedro Solbes told reporters Wednesday that he has asked the finance ministers to issue what he called "early warnings" to Germany and Portugal at their next meeting on February 11.
It is the first time the European Commission has asked EU member states to reprimand two of their own for getting too close to a 3 percent ceiling on budget deficits.
Mr. Solbes acknowledged that Germany, Europe's largest economy, has been hit harder by the global economic slowdown than other EU nations. But he said through an interpreter that its budget deficit is too close for comfort to the EU limit.
"In Germany, recent figures indicated a provisional deficit of 2.6 percent of GDP in 2001. That 2.6 percent figure constitutes more than 1 percent of GDP over the target set in the Stability Program last year," he said.
The Stability Program mentioned by Mr. Solbes was adopted five years ago, at Germany's insistence, to keep less fiscally disciplined countries such as Italy and Greece from continuing their spendthrift habits.
Analyst Hans Redeker of BNP Paribas in London says it is ironic that Germany is among the first countries to get a public rap on the knuckles for threatening the stability of the new euro single currency.
"It's an irony of history that Germany once was the country that was imposing the Stability Pact because they were at that time fearing that other countries could derail the success of the euro by spending too much on the fiscal side," he said. "Now, it is Germany itself."
But what can Germany do? The government says it needs to increase spending to help reignite growth. A recession is brewing. Taxes are too high. And the labor unions are flexing their muscles.
According to Anais Feraj, an analyst at Nomura Securities in London, the European Central Bank is especially concerned about higher wage demands from Germany's powerful metallurgical union. "They're worried about wage negotiations in Germany," he said. "They see them as a likely source of future inflation. But they're also worried about the stability pact because if they see fiscal deficits rising, they'll see that as a good enough reason to start raising rates ahead of time. It's the last thing the European economy needs right now."
As growth in Europe slows, deficits grow. So, it's a vicious cycle not just for Germany and Portugal but for all EU countries trying to meet the Stability Pact's requirements. Some economists say that, unless the Stability Pact is modified, euro-zone governments will find themselves being forced to cut spending at a time when most economies need a boost.
According to Bank of America economist Jeremy Hawkins, in London, the key question now is whether the finance ministers will accept Mr. Solbes' proposal that they issue a warning to Germany and Portugal.
"If they turn it down, then I think it really does raise the whole question mark as to whether or not the Stability Pact itself means anything," he said. "If they accept it, of course, then it just helps to undermine the fiscal credibility of Germany. So, however you want to look at this thing, it's not good news for the euro-zone."
Voting by the finance ministers will be by qualified majority, meaning that a few of the EU's larger countries could muster enough votes to turn down the European Commission's recommendation.