---- by Marilyn Odchimar Gerlach ----
BERLIN (AFX) - Germany's pledge to bring its budget close to a balance by 2004 is an ambitious goal and only likely to be achieved if the economy stages a strong recovery and a new austerity plan is launched, economists said.
They said they do not expect Germany to unveil such an austerity plan before the September national elections or introduce any unpopular measure that would politically hurt chancellor Gerhard Schroeder. Schroeder, whose challenger Edmund Stoiber is using Germany's weak economic performance as the main electoral issue, avoided a public humiliation after the euro group finance ministers yesterday voted not to issue an official European Commission warning on its swelling budget deficit.
Germany in return made several promises, including bringing its budget "close to a balance" by 2004. Germany's previous target had been a balanced budget in 2006 but economists pointed out yesterday's deal was so vaguely worded that bringing the budget "close" to a balance in the next two years leave some room for maneuver for the government on what exactly the benchmark is.
Dieter Vesper, public finance expert in the economic institute Deutsche Institut fuer Wirtschaftsforschung DIW, told AFX News a balanced budget by 2004 depends largely on how the economy performs. "I think it's a very, very ambitious goal... We need a growth rate of 3 pct or more every year -- this year, in 2003 and in 2004 -- and I think it's not possible," Vesper said.
"If he (Eichel) wants to have a balanced budget target in 2004, he has to have additional cuts in expenditure and consider raising taxes. But I think he'll prefer the first way -- cut expenditures," he added. "I think he'll make a decision on cutting expenditures after the election," Vesper said.
Two weeks ago, Eichel said a balanced budget in 2004 will be "very difficult" to achieve based on his expectation of a 2.25 pct growth rate in Germany next year and the forecast 0.75 pct growth this year. A finance ministry spokeswoman today pointed out however that the latest pledge is achievable based on the European Commission's higher growth assumptions of 2.5 pct in 2003 and 2004.
Eichel yesterday told journalists the commitment to bring the budgetary position close to a balance in 2004 means that if an economic upturn brings an increase in tax revenue, it would have to be used on measures to lower the deficit.
But economists said the government needs to come up with new austerity measures in 2003 and 2004 that are more stringent than those launched in 2000.
"There has to be a reduction of expenditures in the central and regional governments, as well as in social security... We need cuts that are much, much more severe than in 2000," said chief economist Joachim Scheide of the Kieler Institut fuer Weltwirtschaft. Scheide said if the government depends alone on GDP growth to achieve a balanced budget in 2004, "then we need a super boom to do that."
Economist Gerd Hassel of BHF Bank said the 2004 target is "too optimistic because economic growth will not be so strong" as Eichel had presumed.
"If the target is 2004, then GDP this year should be 0.8 pct and above 2 pct next year. Eichel's forecast of 2.25 pct in 2003 is a bit optimistic. My forecast is 1.7 pct and about 2 pct in 2004," Hassel said.
"One needs strong growth, at least 2 pct in 2003 and 2004, in order to achieve the 2004 budget target," he added. "There has to be new saving measures or new taxes after the election. One of these measures would have to be done," he said.