Schröder will breach EU stability pact to save political future

Gerhard Schröder,the German Chancellor, is ready to breach the rules of the European Union stability pact to avoid damaging cuts in the economy.

Gerhard Schröder,the German Chancellor, is ready to breach the rules of the European Union stability pact to avoid damaging cuts in the economy.

Chancellor Schröder, who is fighting to save his political fate, is facing a collapse in tax revenues and has ruled out new spending cuts or tax rises. Figures released yesterday showed that Mr Schröder has been warned to expect a £10bn shortfall in 2005 for central government, regions and local authorities. His plan to allow borrowing to rise, and the rejection of fresh spending cuts or tax hikes shows his government has abandoned all pretence that it will stick to EU deficit limits in 2005.

The German government is already deeply unpopular for launching welfare cuts and failing to revive the economy.

The U-turn is part of a campaign by Germany, France and Britain to transform the EU's Stability and Growth Pact, designed to protect the euro from inflation, from a strict rulebook into a voluntary code of conduct, analysts say. The French and German finance ministers, as well as Gordon Brown, the Chancellor of the Exchequer, attacked the pact last year for being too strict and persuaded EU partners to suspend its sanctions. The impact on financial markets of looser budget restraints is likely to be limited since Germany and France have already breached the pact for three years in a row.

Any damage to the euro has already been done, said Norman Williams, an economist at Barclays Capital Research. He said: "The fiscal discipline debate has been an ongoing, drip-drip saga ... The euro is probably weaker than it would have been if the pact had been adhered to strictly. I don't see much market impact now."