LONDON, June 13 - German Economy Minister Wolfgang Clement said on Friday the euro zone's Stability and Growth Pact was flawed for Germany and that changes should be considered once the global economy had picked up. Clement said the pact, which Germany insisted on before monetary union to prevent budget slippage in one euro zone state from raising borrowing costs in others, did not take account of the 75 billion euro annual cost of German unification. "It seems very clear that for Germany there is a mistake in the stability pact," Clement told reporters.
Germany's budget deficit has breached the pact's limit of three percent of gross domestic product for the past two years and it must cut borrowing next year to bring the shortfall back within the rules. As euro zone governments struggle with low economic growth and worsening budget positions, many politicians, including German Chancellor Gerhard Schroeder, have called for the rules of the pact to be interpreted more flexibly. Last year European Commission President Romano Prodi branded strict interpretation of the pact "stupid". Clement said the pact already provided room for flexibility in response to the economic cycle but added that once economies recovered, the pact should be discussed "calmly". "Once we have got past this period of international weak growth, then we will have a discussion about whether we can improve the treaty," Clement said.
Germany, once the powerhouse of Europe, is on the brink of recession. The economy contracted by 0.2 percent in the first quarter of this year and the DIW economic think tank said on Thursday it expected a further 0.1 percent contraction in the second quarter. The government still forecasts 0.75 percent growth this year and two percent in 2004.
ITALY SAYS BUDGET MUST STICK TO RULE
However, Finance Minister Hans Eichel cautioned on Friday that the 2004 budget should still meet rules that demand new borrowing remain below investment. Italy, which holds the rotating presidency of the European Union this week proposed boosting growth in the European Union through more infrastructure investment funded by bonds issued by the European Investment Bank. Italy has said its plans, which it has called a "New Deal" for Europe, was in line with the stability and growth pact. The European Commission has agreed. Clement on Thursday gave the plan a cautious welcome, saying it was important the funds were raised by the EIB and were not simply channelled back to the member states.
Italy has historically struggled with large deficits and, before monetary union, its budgetary track record was viewed with mistrust by Germany. Clement, who is also Labour Minister, is seeking to reform the German jobs market. Germany's unemployment rate stands at 10.7 percent. His two-day visit to Britain was scheduled to include a tour of a London Job Centre labour office. Germany plans to introduce a network of similar centres, with the aim of more quickly and effectively returning job seekers to work. "We are not taking everything from the UK but we are taking the general approach and we are taking the UK as a model," Clement said.//