Germany escapes deficit warning

Schroeder has had the EU deficit embarrassment in an election year

BRUSSELS, Belgium -- Germany has promised to keep its budget within European Commission guidelines in a compromise deal which avoids a formal warning from finance ministers.

Germany, which insisted on the need for the budgetary rules in the 1990s, has appeared to be on the verge of flouting them because of a burgeoning deficit.

The budgetary rules, which allow a member state a 3 percent deficit compared to the size of the national economy, were introduced to ensure eurozone economies remained in step with each other.

Germany -- one of the driving forces behind the euro currency -- is believed to be heading for a 2.7 percent deficit.

Investment bank Bear Stearns said it was inevitable that and "fiscal misdemeanour on Germany's part would be swept under the carpet."

Europe's biggest economy faced an unprecedented "early warning" from the EC but a potentially face-saving deal was reached between the finance ministers during a meeting that went into Tuesday morning.

As part of the compromise, Germany has agreed to reaffirm its commitment to staying within the limit, and to getting its budget close to balance by 2004.

It also promised not to increase spending, and to use any unexpected additional revenues this year towards deficit-cutting.

The finance ministers, in return, closed the case without voting on issuing the formal warning.

The EC insisted the political manoeuvring would not undermine the fiscal underpinnings of the new euro single currency.

"I think the credibility has been clearly maintained," EU Economics and Monetary Affairs Commissioner Pedro Solbes told The Associated Press.

Portugal, which faced a similar fate but for different reasons, were to get the same deal.

The commission argued it was just following the rules of the treaty in recommending the warning.

But German Chancellor Gerhard Schroeder, facing a tough re-election battle this year, decided to fight the impending censure.

German Finance Minister Hans Eichel welcomed the compromise as a "good result."

Germany's treatment is in stark contrast to what happened to Ireland last year when it was reprimanded by the EC for its deficit.

Economist John Butler from DKW bank told CNN the German position had been a "very difficult and delicate political issue."

"This is politics, and the rules are to be manipulated for political purposes. That is not new," he added.

Germany has been one of the largest contributors to the EU in the past and there was a "natural reluctance" by the organisation's member states to make life difficult for it.