The Commission adopted today two recommendations for the Council in relation to the excessive deficit procedure for Germany. The first, under article 104(8) establishes that the action taken by Germany in 2003 is proving inadequate and as a result the excessive deficit will persist in 2004. The second, under Article 104(9), requests Germany to take new measures to reduce the budget deficit and remedy the situation by 2005 at the latest. In order to avoid the risk that the excessive deficit continues for the fourth year in a row in 2005, the Commission considers that the budgetary adjustment in 2004 should be larger than the one contained in the draft Budget for 2004. It is recommended to reduce the cyclically-adjusted deficit by 0.8% of GDP in 2004. Overall, budgetary consolidation measures should secure a lasting improvement in the general government balance. When drawing up the measures to be taken in order to comply with these recommendations, Germany should take into account the recommendations issued by the Council in the framework of the 2003-2005 Broad Economic Policy Guidelines1. They highlight the need for structural reforms as the main solution to the growth under-performance of the German economy. Today's decision follows the Council Recommendation under Article 104(7) of the Treaty on 21 January 2003.
The Commission Autumn forecast, published on 29 October, shows a deficit for 2003 of over 4% of GDP, implying that, contrary to expectations in Spring, neither the nominal nor the cyclically-adjusted deficit were reduced despite the measures taken by Germany. The forecast confirms, therefore, the German authorities' publicly expressed view that the general government deficit in 2004 is likely to exceed 3% of GDP.
Despite the budgetary consolidation measures taken during 2003, Germany is therefore in non-compliance with the second Art. 104(7) Council recommendation issued on 21 January 2003. Germany therefore will not put an end to the excessive deficit situation by 2004 as required by the Council. The Commission has an obligation under the rules laid down in the Treaty Article 104(8) and Regulation 1466/97 of the Stability and Growth Pact to inform the Council of this fact and recommend further steps to be taken according to Article 104(9) of the excessive deficit procedure.
The Commission has considered several arguments when preparing its recommendations:
* the cumulated loss of real GDP growth over the period 2003-2004 compared with what was expected in the earlier Autumn 2002 forecast amounts to about 2 percentage points.
* the fiscal effort necessary to bring the general government deficit below the Treaty reference value of 3% of GDP in 2004 is now larger than what was expected in January 2003, when the Council adopted the recommendation according to Article 104(7). Based on the Autumn 2003 Commission forecast, the required improvement in the cyclically-adjusted balance, is currently estimated to be of the order of 1.3 percentage points.
* The increase in the general government deficit in Germany in recent years is a matter of serious concern. If not corrected, it will lead to a continuous and large increase in the debt to GDP ratio, which may in turn weigh on economic agents' expectations and be damaging for growth. Moreover, the impact of the ageing population on public finances will start accelerating from 2010 onwards, making it even more urgent to reduce rapidly the general government deficit and debt.
Weighing these arguments, the Commission has opted for granting an extra year for the correction of the excessive deficit, as it has proposed for France. In order to avoid risks of persistence of the excessive deficit situation in 2005, the Commission is of the opinion that roughly two thirds of the required overall fiscal consolidation of 1.3% over two years (2004-05) should take place the first year, i.e. in 2004. This is in relative terms the same effort as requested for France.
On this basis, the Commission has submitted to the Council an Article 104(9) recommendation stipulating that Germany shall:
- put an end to the present excessive deficit situation as rapidly as possible and at the latest by 2005;
- achieve in 2004 an annual reduction in the cyclically-adjusted balance by 0.8 percentage points of GDP;
- achieve in 2005 a further reduction in the cyclically-adjusted deficit by at least 0.5 percentage points of GDP or by a larger amount so as to ensure that the general government deficit is well below 3% of GDP; and
- allocate any higher-than-expected revenue to deficit reduction and, should the recovery in economic activity be stronger than currently expected, accelerate the reduction in the cyclically-adjusted deficit.
When drawing up the measures to be taken in order to comply with these recommendations, Germany should take into account the recommendations issued by the Council in the framework of the 2003-05 Broad Economic Policy Guidelines. Moreover, budgetary consolidation measures should secure a lasting improvement in the general government balance. They should be geared towards an enhancement of the quality of public finances and a reinforcement of the growth potential of the economy.
The Germany authorities are requested to submit by 9 January 2004 a report to the Commission outlining the announced decisions to respect the recommendations under Article 104(9). Moreover, the German authorities shall submit four implementation reports over the next two years, allowing the Commission and the Council to assess progress made by the German government in correcting the excessive deficit. Such reports should be submitted in April and in October of each year following the bi-annual Excessive Deficit Procedure notification of deficit and debt data.