France, which pushed its deficit below the ceiling of 3% of GDP last year, will be joined by Germany this year and by Italy in 2007, European Monetary Commissioner Joaquin Almunia said. Germany's deficit may slip under 2.6% this year, while in France „the situation has improved,” and in Italy, home to Europe's heaviest debt burden, a 2007 deficit under the limit is „viable,” Almunia told a news conference in Luxembourg early yesterday after a meeting of finance ministers. Shrinking deficits put an end to years of wrangling over the budget rules, originally designed by Germany to create confidence in the euro. In a turnabout last year, Germany led the way in watering the rules down to escape penalties for violating them. Much of the credit for the narrower deficits goes to a pickup in economic growth, which is likely to reach 2.5% in 2006, the fastest pace in six years, the European Commission predicts.
„Everybody knows that we can't be happy with this,” German Finance Minister Peer Steinbrueck told reporters late yesterday when asked about this year's deficit cuts. „We're compelled to make further progress.” Steinbrueck told the Handelsblatt newspaper that „many obstacles must be navigated” to keep the 2007 shortfall within European Union limits. One hurdle may be a possible EU high court order to repay as much as €5 billion ($6.4 billion) in overtaxed dividends. Tighter fiscal policies may heighten tension within Chancellor Angela Merkel's coalition government of Christian Democrats, their Christian Social Union Bavarian sister party and Steinbrueck's Social Democrats. European Central Bank President Jean-Claude Trichet has warned governments against letting their guard down now that the economy is rebounding, saying now is the time to crack down on deficit spending. Rising ECB interest rates may also upset governments' fiscal plans. The ECB raised its main rate last week for the fifth time in 10 months, to 3.25%, and signaled it will boost borrowing costs again in December to prevent faster growth from fueling inflation.
France is counting on the more buoyant economy to hold down the deficit in 2007, a presidential election year, while enabling the government to cut taxes by more than €7 billion. Finance Minister Thierry Breton expects to trim the budget gap in 2007 to 2.5% of GDP, the lowest since 2001, from an estimated 2.7% this year. „We have not found one-off measures, that is a very positive element,” Almunia said of France's 2007 plans. Almunia and Luxembourg Prime and Finance Minister Jean-Claude Juncker, chairman of the panel of euro ministers, gave their seal of approval to Italy's steps to end a five-year skein of excessive deficits next year. „The results are improving and looking at the budget for next year we think it is viable to have for 2007 the deficit in Italy below 3%,” Almunia said. Prime Minister Romano Prodi's 2007 budget proposal includes €34.7 billion in spending cuts and revenue enhancements, a third of which depends on a stepped-up fight against tax evasion. A new calculation of severance-pay transfers appears to be „acceptable,” Almunia said. A final ruling will be made by Eurostat, the EU's statistical body. Greece is likely to bring its deficit in line in 2006 for the first time in six years, Almunia said. (Bloomberg)