Deficit warning and the consequences: Is a balanced-budget policy achievable?

Last year Germany’s budget deficit was 2.7% of GDP, one of the highest in the EU. For this reason the European Commission recommended that the ECOFIN Council of EU economic and finance ministers issue an early warning in the context of its budgetary supervision. Since the German government reacted by assuring that the 3% threshold would not be surpassed and a nearly balanced budget would be achieved in 2004, the ECOFIN Council did not issue the warning. For Wolfgang Gerhard, Minister of Finance in Saxony-Anhalt, the balanced budget goal is “not only possible but also necessary”. To achieve it, however, it is necessary “that the federal government and the Länder take action eye-to-eye. This necessarily implies more feedback from the federal gov-ernment to the Länder, especially with regard to international agreements and obligations.” Dr. Jürgen Stark, Vice President of the Bundesbank, agrees that “this goal can be achieved. With regard to the importance of the credibility of the budgetary rules established for the currency union, but also taking into consideration the likely macroeconomic development and the fiscal policy challenges of the future, such a policy is not only achievable but also reasonable and necessary in the country’s own interest.” Prof. Helmut Frisch, Technical University of Vienna and President of the Government Debt Committee, describes Austria’s efforts to achieve a balanced budget.