Germany 'may fail EMU budget test'

DIANE COYLE

and IMRE KARACS

Bonn

The future of Europe's single currency was thrown into doubt yesterday by figures showing that Germany might not meet the deadline for taking part.

The perilously feeble state of the German economy meant the gap between government spending and revenues last year was well above the target set in the Maastricht treaty. As Europe's self-appointed financial policeman, failing one of the tests for the single currency is deeply embarrassing to Germany.

The budget deficit amounted to DM123.6bn or 3.6 per cent of GDP last year. It will be difficult to bring it below the 3 per cent Maastricht target by the 1997 deadline without a dramatic change in policies, economists said. If the onset of recession meant Germany faced a struggle, then so would other countries, especially France.

Guntram Palm, a member of the Bundesbank Council, said it might be sensible to postpone the start of European Monetary Union if too few countries met the Maastricht criteria in 1997. However, he said it would be counterproductive for Germany to call for a postponement because this could cause the mark to climb further, hitting growth and job prospects.

''This will be a make or break year for EMU. If there are no signs of life in the economy within the next month or two, the politicians can say goodbye to monetary union,'' said Thomas Meyer, an economist at Goldman Sachs in Frankfurt.

Europe's biggest economy is perilously close to recession, according to yesterday's figures. The economy grew 1.9 per cent in 1995, rather than the 2.9 per cent predicted by the government, according to yesterday's preliminary full-year estimate. GDP did not increase at all in the fourth quarter and might have declined.

A recession in Germany would spill over to other European countries, including Britain. The slowdown in Britain's biggest overseas market has already caused a setback to British exports, according to figures released on Wednesday.

Gunter Rexrodt, the Economics Minister, warned that the economy would have to revive for Germany to achieve the Maastricht criteria and participate in EMU. Faster growth was imperative.

Stephen King, an economist at brokers James Capel, said weak growth would make meeting the target this year very difficult. ''Countries across Europe are trying to satisfy the Maastricht targets at a time when the economic growth that would allow it is just not there,'' he said.

In view of the fresh data, the government has been forced to revise its projections for the current year downwards, to just under 2 per cent. The gloomy outlook spells trouble on the job front, with unemployment nudging 4 million.

When that threshold is crossed, some time within the next two months, the conservative government will find it hard to dispel the impression that after 13 years in power it has run out of steam.

Unemployment will continue to rise because of the effects of high German wages, heavy tax burdens and a strong currency.

The figures triggered a row within the German government, with the main coalition party attacking its junior partner's assessment that the economy had entered recession.

Mr Rexrodt, a Free Democrat, talked on Wednesday of "negative growth" in the last quarter of 1995. By yesterday the situation had recovered somewhat, at least according to Rainer Haungs, a leading Christian Democrat who said that the economics minister had been too pessimistic.

The Free Democrats, whose 47 MPs sustain the government's 10-seat majority, have demanded big tax cuts.