Paris and Berlin Contend with Deficit Woes

As expected, the European Commission on Wednesday reprimanded the French government for not doing enough to lower its budget deficit below the European Union's euro zone limits. Paris has forecast a 2004 deficit of 3.6 percent, which would mean France would stay above the 3.0 percent deficit of gross domestic product (GDP) limit as set by the euro zone’s Stability and Growth Pact for the third straight year.

Since Paris did not meet a Oct. 3 deadline to say how it plans to reduce its projected 2004 deficit, EU Monetary Affairs Commissioner Pedro Solbes will now draw up detailed budget recommendations this month. The move will mark the most severe steps Brussels has taken yet in enforcing the pact that was designed to protect the stability of the euro in the 12-nation currency zone. Moreover, France could be fined up to €3 billion under the terms of the stability pact.

Although the Commission, which acts as the EU’s executive, noted that Paris had started to take steps to get its deficit under control, in a statement it said “the Commission is of the opinion that these improvements are not enough.”

Smaller countries that have worked hard to keep their budgets in order like the Netherlands and Austria pushed for a hard line to be taken against Paris at a meeting of EU finance minister this week in Luxembourg. But Brussels stopped short of officially censuring France, since many other euro zone countries – in particular Germany and Portugal – are also struggling with their budget deficits. “What matters is whether France has moved any. That she has,” said German Finance Minister Hans Eichel.

Berlin’s woes

As if to underscore the woes of Europe’s largest economy, German government officials on Wednesday confirmed media reports that Berlin would likely lower its 2003 growth forecast and was on course to break all records for borrowing this year.

The German government now expects to borrow a reported €41.9 billion this year, which would be an all-time record budget deficit. Previously, Berlin had planned only 18.9 billion in debt for 2003, but sluggish growth and unforeseen expenditures. “It will definitely be double of what was planned,” a spokesman for the Finance Ministry said.

The government is now also expected to slash its growth forecast on Oct. 23 from 0.75 percent to either 0.25 percent or zero. The stagnating economy will make it more difficult to trim its own budget deficit, which Berlin estimates will top at least 3.8 percent of gross domestic product this year.

But Germany has partially avoided the critical gaze of the European Commission by outlining detailed measures by which it will attempt to reduce its deficit next year. Any punitive measures for either France or Germany appear unlikely at the moment, since they would first have to be approved by the Council of Ministers, where both Paris and Berlin have sizable influence.