Germany joins France in showdown over euro budget rules

BRUSSELS, Belgium (AP) - Germany joins France in the European Union dock this week as finance ministers consider whether to punish the two overspenders for violating euro rules on deficits or let them off the hook yet again. 

The European Commission, guardian of the so-called "stability pact,'' insists a fudge by ministers, who meet Monday night and Tuesday, would threaten the foundation not only of the single currency but of the whole EU - and just six months before it expands from 15 to 25 members. 

"It would raise questions about whether European law can be enforced _ a disastrous signal especially to the countries about to enter,'' Budget Commissioner Michaele Schreyer wrote in Germany's Bild am Sonntag newspaper. 

"There are common rules that must be adhered to.'' 

Although markets have so far shrugged off the long-running budget squabbles - the euro hit a record high against the dollar last week - analysts warned that erosion of the currency's fiscal underpinnings would eventually have a negative effect. 

"Markets (are) not willing to tolerate deficits forever,'' London-based economist Vincenzo Guzzo said in Morgan Stanley's report this week. 

"There must be a level of European budget deficits for which markets will start to demand some form of additional risk premium.'' 

European Central Bank president Jean-Claude Trichet also warned that keeping "rates relatively low,'' which helps stimulate economic growth, would be harder if governments pursued lax budget policies. 

Deficits in both France and Germany are set to go above permitted levels - 3 percent of gross domestic product - for a third year in a row next year. 

Brussels is offering them both an extra year - until 2005 - to get back in line but wants additional budget cuts in 2004 to make sure they reach the goal. 

France, which won a reprieve from sanctions three weeks ago, hopes to fend them off again with its own counterproposal for additional savings next year. 

But Germany - which ironically insisted on the rules as a check on less fiscally prudent southerners - is now adopting a defiant tone. 

German Finance Minister Hans Eichel argues more belt-tightening would strangle just-emerging signs of life in the Germany economy after three years of near-zero growth. 

"Further cuts would be a brake on the recovery and thus extend the crisis,'' he said in Saturday's Die Welt newspaper. 

He also notes Germany has followed all the EU's previous budgetary prescriptions and shouldn't be subjected to humiliating sanctions because things didn't work as planned. 

In addition to about 4 billion (US$4.8 billion) in extra cuts, Brussels is also demanding regular progress reports - a level of interference Eichel is loathe to accept. 

With support from Paris, Rome and others, he should be able to block, water down or at least postpone any punishment. 

The Italians, who chair the meeting as current EU president, said Friday they were preparing a "constructive proposal,'' but would not elaborate. 

But EU Economic and Monetary Affairs Commissioner Pedro Solbes was standing firm against a "political compromise'' on what he last week termed the "most important decision since the launch of the monetary and economic union.'' - AP 

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