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19 May 2003

EZA 530 - German, French Budget




German, French Budget Problems to Bring Pact Suspension
German tax shortfalls coupled with deepening French problems with balancing the budget (EZA rpt 529/03May14) are likely to lead to a suspension or reform of the Stability and Growth Pact (SGP). New German tax estimates confirmed another shortfall of 0.5% of GDP this year and projected a cumulative gap of E126bn in 2004 to 2006. However, the real GDP contraction of 0.2%q/q in 1Q03 made even these figures potentially too optimistic. German Finance Minister Hans Eichel has conceded that the nation will not meet even the 2006 deadline to balance the public sector budget, and cut medium-term nominal growth projections to 3.25%. Despite official commitments, EU budget orthodoxy has reached the end of the road, we think, and with it the SGP. With the German economy strangled by the constraints of the SGP and at least three other EU countries failing to comply with the 2004 deficit ceiling of 3%/GDP, a fundamental overhaul of the pact and a re-definition of euro area economic policy coordination is inevitable. Pressure is building to supplant the short-term surveillance procedure by commitment to structural reforms to boost growth potential and balance budgets in the longer run.

SummaryAsset Conclusions: Acceptance of budget overruns and structural reforms will boost long-term growth and related stocks

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© Graham Bishop

Documents associated with this article

EZA530.pdf


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