With Zero Growth, Germany To Borrow Billions

Just as the German government seeks to expedite passage of one of the most ambitious reform packages in the post-World War II era, it admitted just how badly Europe's largest economy is suffering on Thursday.

Following the recent downward growth forecast revisions of the country's leading economics institutes, the Economics Ministry on Thursday said the German economy would stagnate this year. Minutes later, the Finance Ministry jumped on the bad news bandwagon, announcing that deficit spending for the year would reach a previously unsurpassed €43.4 billion ($53.1 billion.)

Though Economics Minister Wolfgang Clement shaved estimated growth from 0.75 to zero for 2003, the news did come with a silver lining. In 2004, the government expects modest growth of 1.7 percent.

But like the economic forecasts in recent months, which have been revised downward one after the other, Clement's latest look into the crystal ball holds equal perils for the federal treasury. Demonstrating the uncertainty of the government's fiscal prognosis, Clement said growth could fluctuate between 1.5 percent and, if things go exceedingly well, 2 percent.

"Important indicators have been pointing towards a recovery for some time now," Clement told journalists at a press conference in Berlin.

The most important condition, Clement said, is for the global economy to continue to show signs of improvement, especially the expected recovery in the United States. The forecast also assumes there will be no major shifts in exchange rates or dramatic fluctuations in oil prices.

He also warned that improved economic growth would only be possible if the government’s reforms of the labor market as well as the proposed overhaul of the health and pension systems were fully implemented. Clement added that ongoing and often rancorous cross-party bickering over Schröder’s reform agenda were not in the interest of people in this country and urged the opposition conservatives not to block the reforms in the country's upper legislative chamber, the Bundesrat.

Additionally, he said, it is vital to fuel consumer spending through lower income taxes and prevent non-wage labor costs from rising further. Clement added that a favorable development of the national economy next year also depended on a euro not being too strong against the dollar to support German exports.

Qualifiers aside, the talk on Thursday was not of a full-fledged economic upturn, but rather that of a "recovery."

Casting a further shadow over Clement's news on Thursday was an announcement by Finance Minister Hans Eichel that deficit spending for 2003 would exceed €43.4 billion -- billions more than the €18.9 billion originally estimated. Eichel submitted a request for the additional borrowing to the Bundestag, Germany's parliament, on Thursday.

"This €24.5 billion difference is half the result of lower tax revenues and half the result of additional labor market expenditures" stemming from Germany's high number of jobless, Eichel said.

The announcement is also likely to sound the alarm bells in Brussels, where the European Commission had been expecting a 3.8 percent budget deficit for Germany. The additional expenditures mean Germany's deficit spending will now rise to over 4 percent for 2003 -- well above the 3 percent limit in the Maastricht Treaty's Stability and Growth Pact, designed to underpin the euro.

For the first time, Eichel also admitted Germany would exceed the 3 percent limit in 2004, too, meaning the country would violate EU monetary policy regulations for three years in a row. The announcement drew immediate criticism from opposition quarters.

"Up till now, there's never been such an inaccurate estimate from the office of the finance minister," said Friedrich Merz, deputy chair of the Christian Democratic Union's parliamentary group. "Given what we have heard both from the economics minister and the finance minister, I'm not optimistic that the government is aware of the scale of the problems we are dealing with in this country."

More bad news is expected when Eichel issues his next tax revenue estimate on November 6. Experts have warned that the government faces reduced tax revenues in excess of €6 billion in the coming year. The Finance Ministry is hoping to ease the burden on state coffers by selling more shares in Deutsche Telekom and Deutsche Post, the national postal service monopoly. Eichel is also calling on the government to press ahead with planned federal subsidy cuts.

The latest round of borrowing is expected to bring Germany's total federal deficit up to €820 billion. Taken together with state and community-level deficit, that figure would grow to €1.4 trillion.

That will place additional stress on the country's already overburdened coffers. In 2003, alone, the government has to pay €40 billion in interests payments on its borrowing.

Germany slashes growth forecasts; warns it will breach EU budget rules

BERLIN (AFP) - The German government slashed its official growth forecasts for this year and next and warned that Germany's public deficit was likely to remain in breach of EU limits for the third straight year in 2004 as a result.

The Economy and Labour Ministry, publishing its latest updated economic forecasts, predicted that the eurozone's biggest economy would stagnate in 2003 and grow by 1.5-2.0 percent in 2004.

"Given the difficult economic situation in the first half of 2003, the government expects real gross domestic product (GDP) growth to average zero for the whole of the year," the ministry said Thursday.

Nevertheless, "for some time now, important indicators have been pointing to a recovery. And for the second half of this year, the government, along with the economic institutes, is banking on a slight rise in overall economic activity.

"In 2004, that upward trend will continue and gain a broader footing, greatly helped by the bringing forward of the tax reforms and the extensive reforms we have embarked upon," the ministry continued.

"The government is forecasting GDP growth of 1.5-2.0 percent next year, and a figure of 1.7 percent will serve as a basis for our decisions. This estimate is in line with the current range of forecasts made by national and international institutes," it said.

Previously, Berlin had targeted GDP growth of 0.75 percent this year and 2.0 percent next year, but had been widely expected to cut its forecasts to bring them in line with the prognoses of most economic experts.

The International Monetary Fund, for example, has pencilled in zero growth for Germany in 2003.

And Germany's six leading economic research institutes predicted in their autumn report published earlier this week that GDP would stagnate this year and grow by a modest 1.7 percent next year.

The institutes cautioned that there were still some substantial clouds on the recovery horizon, including the poor state of Germany's public finances, as well as a growing risk that an abrupt fall in the dollar could jeopardise global economic recovery.

High unemployment and weak growth is indeed weighing on the German public purse.

The federal budget deficit alone, which does not include the regional state or municipal budgets, was expected to amount to 43.4 billion euros (51 billion dollars) this year, Finance Minister Hans Eichel said.

That figure would be the highest since World War II and would be more than double the amount Eichel had originally forecast for 2003.

In fact, Germany was unlikely to be able to bring its public deficit back within EU budget limits next year, meaning it will likely breach the rules of the Stability and Growth Pact for the third straight year, Eichel warned.

"Since we're not going to achieve growth of 0.75 percent this year or 2.0 percent in 2004, it's clear that we won't be able to meet the 3.0 percent next year," the minister told a news conference.

Under the terms of the stability pact, eurozone members are not allowed to run up public deficits in excess of 3.0 percent of gross domestic product, a limit that Germany already breached last year with a deficit ratio of 3.5 percent.

The government had made its meeting the 3.0-percent rule next year conditional on economic growth of 2.0 percent.

Eichel said that this year the German deficit ratio would come out "above 4.0 percent".

He declined to provide a more concrete forecast, but recent press reports have put it at 4.3 percent.

Eichel vowed to "do everything to bring the ratio back below 3.0 percent in 2005," noting that this week the EU Commission in Brussels had also given France an additional year to get its finances in order.

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