Eurozone crisis over German debt

12 April 2012

THE single currency was plunged into crisis when Germany, for decades the powerhouse of Europe, was warned to sort out its economy or face a massive fine. European Commission bureaucrats issued an unprecedented edict to Berlin ordering it to take action to cut its deficit

German ministers will have to cut spending or raise taxes to avoid punishment. Such measures can only further cripple the economy, which is teetering on the edge of recession as unemployment soars towards 4.3m. They could also be politically suicidal with a General Election due later this year.

It is the starkest example yet of the dangers of the single currency's 'one size fits all' ethos.

The EC recommended on Wednesday that EU finance ministers issue an 'early warning' to Germany that its projected budget deficit threatens to breach the limits set out in the euro's so-called Stability and Growth Pact. A similar early warning should be given to Portugal, said the commission.

The pact requires countries to keep their budget deficits below 3% of gross domestic product. Germany's deficit rose to 2.6% of GDP last year, compared with a forecast 1.5%, and the commission believes it will rise to 2.7% this year. European Union finance ministers, who meet on 11 February, will have to decide whether to adopt the tough line as a show of resolve to sceptical money markets.

Rejecting it would cause a massive row within the EU. If they do issue the warning, it will leave Germany with the choice of obeying and deepening its own crisis or ignoring Brussels and undermining the currency.

'This is building up to be the first real test we have had of the stability pact,' said Jeremy Hawkins, of Bank of America in London.

The finance ministers will vote by qualified majority, meaning that a few of the bloc's larger states could team up to protect Germany and vote down the recommendations. But such a move could have a devastating impact on the credibility of the euro just a month after the launch of notes and coins across the 12 eurozone countries.

Britain angrily rejected a Brussels demand to slash £10bn from its public spending targets. The EC says Chancellor Gordon Brown's plans to run a budget deficit equivalent to 1.2% of GDP for 2004-5 to help pay for improved public services contravene its economic stability pact. The Treasury said the EC was ' taking too narrow a view of the pact'.

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