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. Last Updated: 07/27/2016

Germany Calls Its Deficit 'Huge'

BERLIN -- German Finance Minister Hans Eichel has conceded for the first time that Berlin would be unable to keep its budget deficit below the EU's 3 percent of gross domestic product limit in 2002.

"It's clear we are going to have a huge hole [in the budget] this year. I can't say how big until the [November] tax estimates, but I don't think it will be possible for us to stay under the 3 percent deficit limit this year," Eichel told N-TV television in an interview Wednesday.

On Thursday, however, he dismissed media reports of the hole being 14 billion euros ($13.7 billion) or bigger as "wild speculation."

Eichel's comments Wednesday came just hours after European Economic Affairs Commissioner Pedro Solbes said European Union budgetary policy was facing a critical test in coming months.

The EU executive Wednesday opened a so-called "excessive deficit procedure" against Portugal for breaching the 3 percent limit.

Under the EU's Stability and Growth Pact, which Berlin insisted be adopted prior to the single currency's launch, euro zone countries can be fined if they ignore policy recommendations to bring "excessive" deficits down.

Germany's opposition conservatives said Eichel's admission meant Germany faced a fine of 4 billion euros -- equivalent to the 0.2 percent of GDP minimum laid down in the pact.

Eichel said he expected Germany would face the same fate as Portugal, but was confident Berlin could avoid a fine.

He pointed to increases in taxes and spending cuts in 2003 that the re-elected coalition of Social Democrats and Greens unveiled this week alongside its new government program.

In a first reaction to Eichel's statement, Solbes hinted the commission would open the excessive deficit procedure as soon as November, when it presents its next economic forecasts.

But he also heaped praise on Germany for taking tough action to address its budgetary problems. "At first sight it seems that decisive steps for budgetary consolidation are planned for 2003 and 2004," Solbes said in a statement.

"Solbes today expressed himself positively about what we in the coalition are planning to do," Eichel said.

"We will naturally be confronted with an excessive deficit procedure. That is completely in order, it has to happen," Eichel said, signalling Berlin would not fight the commission the same way it did in February over an earlier budget warning.

He added: "I am optimistic because the measures we are planning next year will make sure we stay clearly below the 3 percent limit."

The pact's procedures are lengthy. It takes at least two years before countries judged to be in breach run a real risk of being fined, giving them plenty of time to adjust policy.

In a later statement to journalists in parliament, Eichel said he did not rule out presenting a supplementary budget for 2002.

A decision would be taken in November after the new tax estimates, he said, but he noted data already showed September revenues were worse than a year ago.

The Taggesspiegel newspaper on Wednesday quoted an economist from Berlin's DIW think tank predicting a 2002 federal deficit of 31 billion euros, compared with a planned 21 billion.

The news came the same day as Foreign Minister Joschka Fischer called for the pact to be interpreted "flexibly," echoing a comment made by Chancellor Gerhard Schr?der earlier in the week. The coalition in their agreement signed on Wednesday also made a veiled call for the European Central Bank to cut interest rates.

But Eichel insisted Berlin was not seeking to deliberately undermine the pact. "We are not violating the spirit of the pact with our actions," he said.

He said other euro zone countries were facing the same problems as Germany and some had even deviated more from their budgetary goals, citing Ireland and the Netherlands.

"You will see many other EU countries deviating from the criteria more strongly than here," Eichel said.

The euro would not be affected, he said. The single currency and bonds barely budged on the news.

The European Commission on Thursday played down its president's description of the EU Stability and Growth Pact as "stupid," pointing out that Romano Prodi was simply calling for flexible implementation.

A spokesman for the European Union executive told a news briefing that Prodi's comments, in an interview with the French daily Le Monde, should not be taken in isolation.

"He is saying you have got to have flexiblity in implementing the pact," the spokesman said. "The Stability Pact implemented in a flexible way is -- the president has said this and he said it again -- the cement of our economic policy."