The German government is just coming to know what it is like to be "hoist on ones own petard" — being blown up by a bomb of its own placing. It was Germany which insisted on strict economic and financial rules for every country that adopted the single European currency. It is now Germany which is going to be the first country in euroland to break those very same rules.
The problem is the 3 percent limit of the government’s budget deficit. Confidence and output has collapsed in Germany, unemployment is still rising, growth is still falling and even optimistic government forecasts see the budget deficit at 2.7 percent by the end of this year. Last year these same economists were predicting a 1.5 percent deficit, which in fact turned out to be 2.6 percent. Many analysts are certain that Germany will end the year in breach of the 3 percent deficit limit, upon which it itself insisted so rigorously when the whole single currency venture was mapped out at Maastricht. The European Commission is so disturbed that it has issued formal warnings to the German government, as well as to the Portuguese, whose deficit alarming doubled last year to 2.2 percent, suggesting government finances are in danger of running out of control.
So, what does Germany’s embarrassing scolding prove, except that Europe’s most powerful economy is currently suffering from a severe recessionary cold ? Some analysts will still argue that the basis on which many of the eurozone countries qualified under the key 1997 Growth and Stability Pact was fraudulent. France fiddled away a budget deficit by including state pension assets as a current asset. Germany tried to pull a similar trick by revaluing its gold reserves. Belgium and Italy, whose debt to GDP ratio exceeded the 60 percent laid down in the rules, were told that they would still qualify for membership, because both countries were bringing the ratios down.
The single-currency exercise has been almost entirely driven by political rather than economic considerations. Now that Germany is on the brink of breaking its own rules, the consequences look as if they will be political too. German voters, who are becoming resigned to the loss of their security-blanket deutsche mark and to using the brand new euro instead, are going to find that Brussels will insist their government move quickly to head off its excess deficit. If Brussels really does fulfil its obligations under the provisions of the Growth and Stability Pact and cracks the whip, the Germans will have their first experience of their economy being controlled by unelected outside forces. This could well decide the way they vote in September’s general election. An anti-European swing would benefit the German far-right nationalists.
However, what is more likely is that Brussels will do what it generally does — just huff and puff. If it waits while the German government massages its figures into some acceptable form, it will let the European Union’s most powerful economy off the hook, and give a bad signal to less robust economies, such as the French and Italian. They will rightly reason that if the Germans, who wrote the rules, are not made to abide by them, why should those who from the outset always doubted the wisdom of such rigid targets stick to them?
