Eichel's Balancing Act

Hans Eichel faces the toughest challenge of his career. Germany's newly reappointed Finance Minister must rein in this year's budget deficit, which could top 2.9% of gross domestic product--perilously close to the 3% ceiling set by the European Union's Growth and Stability Pact. Then, he has to tackle a forecast $9.8 billion shortfall in 2003 tax revenues, the result of slower-than expected economic growth. What's more, he must do both without alienating either fellow ministers in Chancellor Gerhard Schröder's coalition of Social Democrats (SPD) and Greens, or powerful interest groups.

Some SPD left-wingers have called on Eichel to solve Berlin's financial crisis by increasing inheritance, wealth, and other levies. And the Greens want ecological taxes raised. But Eichel, backed by Schröder, fears tax hikes would hurt the economy, which looks set to grow by just 1.5% next year compared with the 2.5% forecast the Finance Ministry based its budget on. So Eichel plans to cut spending and slash subsidies.

Subsidies to agriculture, mining, and other protected industries cost the government an estimated $28 billion, almost 1.5% of GDP, a year. But farmers and miners wield clout in Berlin and will strongly oppose cuts. Nor are the Transport and Defense Ministers likely to welcome expected budget reductions. Even the Bush Administration is weighing in. Already irked with Schröder's opposition to war with Iraq, the U.S. is lobbying against Eichel's plans to curb military spending, analysts say.

By David Fairlamb in Frankfurt

Edited by Rose Brady

Before it's here, it's on the Bloomberg Terminal.