19th May 2022

Germany set to break euro rules until 2010

IMF experts have suggested Europe's biggest economy is set to break the eurozone deficit limit until 2010.

The Washington-based International Monetary Fund unveiled the remaining chapters of its World Economic Outlook report on Wednesday (21 September).

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The document reflected the Fund's pessimism over Europe's growth, cutting its GDP forecasts to 1.2 percent for 2005 and 1.8 for 2006.

It also suggests the German deficit will remain above 3 percent until 2010, meaning the country will not be able to comply with the Stability and growth pact, the rules underpinning euro.

The experts predict Germany's deficit to reach 3.9 percent this year, and it is estimated at 3.2 percent in 2010.

The main factor behind the gloomy picture is the country's sluggish economic growth, although it may be improved as a result of the Agenda 2010 economic reforms initiated by the previous red-green government.

According to Raghuram Rajan from the IMF, reforms creating more labour supply could now be "taken to their logical conclusion" by "increasing the incentives for corporations to actually hire more people, for example by reducing some of the regulatory burden on them, reducing the extent of payroll taxes, and so on".

Mr Rajan added these steps could "be done by the new (German) government, whoever it is", at a press briefing following the launch of the report on Wednesday (21 September).

But he suggested politicians should do better in explaining the reasons for changes that need to be carried out in Europe, where the main problem remains weak domestic demand.

European citizens "do not seem convinced the bitter medicine of continued structural reforms will cure the stasis that afflicts much of the continent", Mr Rajan pointed out.

"It is a failure of politics that people have not come to see that the more they want to retain the attractive European way of life, the more the way they work will have to change", he added.

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