Germany ‘cannot save its way out of deficit’

Germany must revive its economy and labour market if it is to resolve its crushing fiscal problems, the country’s finance minister said on Thursday, rejecting proposals to rely solely on budget cuts to reduce near-record borrowing.

In remarks seen as a harsh rebuttal of economists in the Bundesbank – Germany’s central bank – and elsewhere, Peer Steinbrück said: “We can’t save our way out of our budget problems. That’s a hopeless prospect. There will only be progress if there is also movement on the economy, in the labour market and regarding our social security system.”

In an interview at his ministry, Mr Steinbrück rejected being pigeon-holed like his predecessor, Hans Eichel, as a Sparkommissar – or “savings commissar” – arguing that he would focus on promoting “future-oriented” business sectors.

Net new borrowing will reach €38bn ($45bn, £26bn) this year, up from €31bn in 2005, according to the budget adopted by Chancellor Angela Merkel’s cabinet this week. The Bundesbank said extra savings could have been made.

Mr Steinbrück also distanced himself from the confrontational tactics employed by former chancellor Gerhard Schröder towards the European Commission, arguing that such an approach these days would be damaging to Europe as a whole.

The comments suggest that Mr Steinbrück, a Social Democratic party ally of both the former chancellor and Mr Eichel, intends to make a clean break with the Schröder era, heralding closer co-operation with European partners and a broader reform role for the finance ministry.

In November 2003 Mr Schröder’s government, in alliance with France, pushed the European Union into crisis by blocking Commission proposals to discipline Berlin for breaking the EU’s stability and growth pact.

Even though Germany will breach the pact’s limits on budget deficits again this year, Mr Steinbrück does not intend to repeat the stand-off. He prefers striking a deal with Joaquín Almunia, EU monetary affairs commissioner, and using Germany’s weight to shore up the bloc’s institutions.

“We have to take a different approach than in November 2003, because a repeat of that situation would lead to the stability pact losing its credibility entirely. If that happened, we in Europe would have another problem on our hands,” he says. Other concerns he listed were the stalled draft EU constitution, the bloc’s long-term budget and the stability of the euro.

The deal with Mr Almunia is likely to involve the Commission next week launching disciplinary proceedings against Berlin but suspending them in July, when the minister presents a draft 2007 budget that – for the first time since 2001 – is likely to return a budget deficit of less than 3 per cent of gross domestic product.

This approach is in tune with Mr Steinbrück’s pragmatic political style, and his reputation as the most market-friendly SPD minister in Angela Merkel’s “grand coalition” government.

A dry north German with an ironic sense of humour, Mr Steinbrück, 59, has already struck up a close working relationship with Ms Merkel, another northerner who shuns showy political gestures.

Tough times lie ahead, he admits. “The pressure to solve the budget problems is bigger than in the past, and this means the whole cabinet, including the chancellor, is aware of the consequences if this political task fails.”

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