Germany Admits Defeat on Deficit

BERLIN -- The German government sharply lowered its economic-growth forecast and conceded it would violate European fiscal rules for the third straight year in 2004.

Until now, Chancellor Gerhard Schroder's center-left government had been more optimistic about the state of Europe's largest economy than most economists. "We have to get honest with ourselves," Economics Minister Wolfgang Clement said at a news conference.

The government now expects gross domestic product to stagnate in 2003 -- the worst performance in a decade -- before recovering to growth rates of between 1.5% and 2% next year. In the spring, the government had predicted growth of 0.75% for 2003 and 2% for 2004. The economy has hardly expanded in the past three years.

Although economists had long expected it, Finance Minister Hans Eichel said for the first time that the budget deficit will exceed 3% of GDP until 2005, surpassing the deficit cap for European Union countries. France has already said it will overshoot the 3% limit for the third straight year in 2004.

Just two days ago, the European Commission, the EU's executive body, gave France an extra year¹ to bring its public finances under control, and Brussels hinted on Thursday that it will show similar leniency toward Germany's deficit problems.

In theory, the commission can propose fines against serial budget busters. But instead, EU Commissioner for Monetary and Economic Affairs Pedro Solbes said on Tuesday that Paris had until 2005 to narrow its deficit below the 3% limit. The commission had previously said that France must do so by next year.

"Mr. Solbes said that he will give equal treatment to member states," his spokesman, Gerassimos Thomas, said on Thursday, when asked about the German situation.

For this year, Mr. Eichel predicts that Germany's deficit will be more than 4% of GDP, compared with 3.5% last year. He will give a more detailed deficit forecast later this year, after German tax-revenue estimates have been updated in early November.

Write to Andrea Thomas at andrea.thomas@dowjones.com²

Updated October 24, 2003