Bundesbank taxes Italy and Belgium over huge debts

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GERMANY is set to erect new hurdles for the two worst-performing countries in the bunch of 11 that are likely to be selected for the next stage of European Monetary Union.

Responding to a critical report from the Bundesbank, Theo Waigel, the Finance Minister, suggested yesterday that Germany would make new proposals at the next meeting of European finance ministers, seeking binding guarantees from Italy and Belgium that they will reduce their debt mountains.

The two countries came in for a severe ticking-off from the report that Bundesbank president Hans Tietmeyer submitted to the German government yesterday. "Serious concern exists in the case of Belgium and Italy," states the Bundesbank's convergence report.

Efforts by the Belgian and Italian governments to cut their "extremely high" debt burdens are "insufficient". There remained, according to the German central bank, "grave doubts about the sustainability of the governments' financial position".

Without making any specific suggestions, Mr Tietmeyer called on the two countries to "undertake additional, firm and substantive commitments". Mr Waigel added that the government backed these demands, and would be spelling them out in due course.

A cabinet statement issued after the meeting with Mr Tietmeyer echoed the Bundesbank in complaining that the "high level of debt in Italy and Belgium remains unsatisfactory". "The federal government shares the concern expressed by the European Commission, and particularly the EMI [European Monetary Institute, forerunner of the European Central Bank] as well as the Bundesbank. Quick reduction [of debt] is needed in both countries. Increased efforts are required."

Germany is expected to seek assurances from the Italian government that the convergence programme will not be disrupted by political turmoil in Rome. Germany ideally would like the Italian parliament to adopt a three-year plan to reduce government debt, which stands above 120 per cent of GDP.

The central bank's prescription for Italy will create tension between Rome and Bonn, but it is a price worth paying if it silences Euro-sceptics in Germany. The report certainly reassured Edmund Stoiber, the Bavarian Prime Minister who has been among the fiercest critics of the euro.

"This is exactly what I wanted to hear, and I believe that continued positive support [for EMU] would not have been possible without such an evaluation," Mr Stoiber said.