Germany's debt puts the skids under eurozone

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The Independent Online

The European Commission is considering warning Germany over its vast public debt, which threatens to weaken the euro and undermine business confidence on the Continent.

No EU state has been ticked off for breaking the budget deficit limits imposed by the legally binding rules for membership of the single currency. The mere hint emerging from Brussels yesterday that Europe's biggest economy was already perilously close and faced a reprimand sent the euro on the slide and sparked frenzied activity in Berlin.

According to official figures released yesterday, growth in Germany slumped in the past year to 0.6 per cent, the smallest in eight years, and far lower than budgeted for. To make up the shortfall, the government was forced to borrow heavily, raising the deficit to 2.6 per cent of gross domestic product.

The deficit limits, foisted on other European countries by Germany as a means to underpin the euro, impose a 3 per cent deficit limit. Breaching the limit triggers huge fines.

Last year, Germany cleared it with 0.4 of a percentage point to spare but, with no end to its economic woes in sight, this year has even worse in store.

The Commission's official estimate, which proved to be grossly over-optimistic last year, sees the German deficit rising to 2.7 per cent in 2002.

Michaele Schreyer, one of the German commissioners in Brussels, told the newspaper Die Welt : "The situation in Germany, saddled with a relatively high level of indebtedness, is undoubtedly critical."

The Commission has been examining the economic performance of the 12 states bound together by the euro, and passed most of them with flying colours. Germany and Portugal have not made the grade.

On 30 January, Brussels will produce a report, which, according to the German financial daily Handelsblatt, would sound the alarm bells. A commission spokesman insisted yesterday that no decision on Germany's "yellow card" had so far been taken.

The government in Berlin is desperate to avoid such an ignominy in an election year. Chancellor Gerhard Schröder's opponents would seize on any criticism from Brussels as evidence of his mismanagement.

But even if Berlin escapes a formal telling-off, the EU's largest country and the euro are in for a bumpy ride in the coming months. When the economy starts to recover is anyone's guess.

Unemployment is soaring, with the headline figure expected to reach 4.3 million by March. When Mr Schröder came to power just over three years ago, he made only one specific promise, namely that he would bring unemployment down to 3.5 million by the end of his term. He sensibly ditched that pledge last year, for it now appears that the jobless rate on election day in September will be almost identical to the figure bequeathed by Helmut Kohl four years ago.

In the climate of mounting economic crisis come signs of industrial unrest. Ig Metall, the country's most powerful union, has put in for a 6.5 per cent pay claim. Ig Bau, the building sector union, is going for 4.5 per cent. A summer of discontent looms.

The tangible feeling of uncertainty makes a mockery of the Eurocrats' formerly confident assertions that they are able to calculate this year's budget deficit to the decimal. The timing and strength of German recovery are unknown, as are the future wage costs of the country's industry.

Not least, there might well be a new government in place by the end of September. The conservative opposition, ener-gised by its new leader, Ed-mund Stoiber, has already moved five points ahead of the Social Democrats in the polls. And the worst economic news looks likely to be ahead.