Brussels issues fiscal demands to Berlin

The European Commission has proposed a tight four-month deadline for Germany to take action to cut its ballooning deficit, to meet strict rules underpinning the euro.

In a humiliating slap for Germany, whose ailing economy is the EU's biggest, Brussels launched the second step of a formal "excessive deficit procedure" against Berlin.

"The German goverment should take such measures to bring the excessive deficit to an end by 21 May, 2003," said the EU executive in a statement.

The German government immediately acknowledged it would have to take "necessary and probably painful measures in a number of areas" to ensure its public deficit is reduced.

"We are openly happy about the decision taken by Brussels," said a spokesman for the German Finance Ministry in Berlin.

Specifically, the commission called on EU finance ministers to adopt its recommendations to Germany when they meet in Brussels on January 21. The deadline was set for four months after that meeting.

In the commission's words, "The excessive deficit in 2002 did not result from an unusual event outside the control of Germany, nor did it result from a severe economic downturn."

The deficit procedure was initially launched in November by the EU executive arm, after the publication of forecasts indicating Germany's deficit for 2002 would expand to 3.8 percent of gross domestic product.

That figure would be well above the 3-percent ceiling set by the Stability and Growth Pact, which fixes tight budget rules for the 12 countries which share the single European currency.

The excessive deficit procedure, which in theory could result in huge fines, was first launched against Portugal last year.

But it is all the more humiliating for Germany, the architect of the 1997 pact. In Berlin, officials suggested the Brussels move only underlined the reforms they were trying to put in place.

The German Finance Ministry reaffirmed in a statement that it aimed to balance its budget by 2006 and that great efforts were being made to revive the economy.

"To stimulate German growth, widespread reforms must be made to the labor market and social security system. The first steps were taken when the Hartz recommendations were put in place, and others will follow this year," the ministry said.

The Hartz commission was set up by Chancellor Gerhard Schroeder last year to slash high unemployment, currently at around 10 percent.

"With the decisions aimed at putting in place the Hartz recommendations and the measures taken in the health sector, we have started to prepare Germany for the future," the ministry said.

The German government is still officially predicting growth of 1.5 percent this year but is widely expected to cut that forecast at the end of January. One of Germany's leading economic research institutes, DIW, said it expects the economy to grow by a meagre 0.6 percent this year, only marginally faster than the 0.2 percent pencilled in for 2002.