Germany On the Brink of Recession

Europe’s economic powerhouse is flagging. The shock of the September 11 attacks still has many firms reeling. Just as a recovery looked like it was around the corner, the effects of the attacks have hit the German economy where it hurts.

Growth forecasts are down and business sentiment has fallen to an eight year low. There are shortfalls in expected tax revenues. Unemployment is rising.

Trade unions and bosses have been united in urging the government to follow the example of neighbouring France and react to a slowing economy by speeding up planned tax cuts or spending on infrastructure to support investment.

All of the country's leading institutes have spoken out to bring forward tax cuts in order to stave off recession.

But despite the advice and a raft of bad figures, German Finance Minister Hans Eichel refuses to give in to calls for an economy-boosting programme. He insists the EU budget rules must be respected at all costs. "Economic stimulus programmes do not help at all," he told Reuters in an interview.

And the governments’ room for manoeuvre is in fact limited, given Germany's commitment to euro-zone spending limits.

Eichel said Germany's budget deficit, rising to 2.7 percent of GDP next year, was already getting too close for comfort to the three-percent ceiling set by Maastricht Treaty rules on monetary union.

The government cannot risk back-tracking on the euro-zone Stability Pact, as it had insisted on it in the first place. It would hurt the government's hard-won reputation as a strict budgeter. And probably lead to a row with the European Central Bank.

Eichel says he can still balance his budget by plugging the shortfall in tax revenue with additional revenue from the privatisation of state assets.

And many people overlooked the fact that tax cuts worth 19 billion marks would come into effect in 2002, and 12 billion marks would be spent in coming years in the form of investment by Deutsche Bahn, the federal railway, the finance minister added.

Furthermore, Germany’s budget deficit would avoid becoming "conspicuous" among EU states because of progress made in curbing spending over the last three years. "So one sees how important budget consolidation was and remains," Eichel said.