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EU cracks down on German deficit
BRUSSELS, Belgium (CNN) -- The European Commission said on Wednesday it was cracking down on Germany and other major euro zone economies for breaching its rules on excess spending. The Commission -- the administrative arm of the 15-nation European Union -- has set a deadline of May 21 for Germany to adopt measures to cut its budget deficit this year, after it confirmed that the region's largest economy exceeded the guidelines on deficit limits in 2002. It also warned France and Italy -- the euro zone's second and third largest economies -- as well as Greece and Finland that their deficits were approaching the limit of 3 percent of gross domestic product, as set out by the Stability and Growth Pact. The Commission's recommendations must still be approved by EU finance ministers. That vote is expected to take place on January 21. In announcing the results of a review of Germany's budget plans, the Commission said: "While it was clear that the deficit would be reduced, it was not yet possible to access whether the deficit would come to fall below the three percent reference level." The Commission has criticised Germany for breaching the deficit ceiling in 2002 -- most economists put the overspending level at 3.8 percent -- and has been warning that it must do more to bring down spending this year. Germany is the second EU country to run afoul of the deficit rules. Portugal faced a similar procedure for overspending in 2001. The disciplinary action by the Commission comes as Germany struggles to recover from recession, which gripped the country in the second half of 2001. Since then, the economy have barely grown and the unemployment rate has soared to almost 10 percent. The coalition government of Gerhard Schroeder, which was re-elected in September on a promise to turn the economy around, has launched a programme to raise taxes, increase social security contributions and reform the labour market. On Tuesday, the German economic institute DIW lowered its forecast for 2003 growth to 0.6 percent from 0.9 percent. It said the economy would likely expand by 1 percent in 2004. But DIW warned that tax increases could have a negative impact on the German economy by reducing investment and spending as companies and individuals tighten their belts. The Stability and Growth Pact has also come under fire from other EU members for encouraging spending cuts at a time when most countries need economic incentives to rekindle growth. U.S. President George W. Bush announced tax cuts on Tuesday to boost the economy pushing the country further into deficit. In fiscal 2002, the United States budget deficit came in at $159 billion -- ending four years of surplus. (Full story) However, the Commission on Wednesday dismissed the argument by Germany that it needed more leeway in spending to address economic problems. "The excessive deficit in 2002 did not result from an unusual event outside the control of Germany, nor did it result from a severe economic downturn," the Commission said in a statement.
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