A €15 billion shortfall in tax receipts next year leaves the Chancellor in an unenviable position, writes Derek Scally.
The German Chancellor, Gerhard Schröder, has always been as much escape artist as politician. His greatest talent lies in his pragmatic proficiency at wriggling out of a difficult situation with seconds to spare.
But Mr Schröder's wriggle room has been steadily shrinking in the last months, leaving him in a situation unenviable for any leader. Germany is on course to breach the Maastricht criteria governing the euro for the fourth consecutive year in 2005. A major reason emerged yesterday, namely a €15 billion shortfall in tax receipts next year that will balloon to €50 billion by 2007.
After six years in office and four years of economic stagnation, Mr Schröder's government has a long, contradictory to-do list: plug the multi-billion holes in the German budget without running up new debts that would breach the Stability Pact and without hitting voters by raising taxes. Meanwhile, it is expected to implement painful reforms, encourage economic recovery, get people spending and create jobs for the four million unemployed, 10 per cent of the workforce.
With rapidly reducing wriggle room, Mr Schröder, escape artist, this week began rattling the bars of the Stability Pact cage.
As far as he is concerned, he said on Wednesday, "the pact is really, in this phase, to be interpreted in a growth-orientated fashion". He added that any "sensible changes" to the pact suggested by the European Commission or other eurozone members would have Berlin's full support.
Berlin officials, it is worth pointing out, refer to the pact using the full title, the Stability and Growth Pact.
They point out defensively that a country can have stability in a recession but that what Germany desperately needs now is growth, at any price, even if that price is the rulebook to guarantee the stability of the euro that German officials demanded from their European partners in 1997.
"The main architect of EU budget strictures is throwing in the towel," says Prof Uwe Andersen, politics professor at the University of Bochum. "Mr Schröder is concerned about the economy and will do whatever it takes to get it back on track."
For the first year after his re-election in 2002, Mr Schröder's strategy for economic recovery was what he called "silent-hand politics". He was determined to keep his hands out of the economic engine despite expert advice for reforms to kick-start growth.
Then, in March of last year, this pragmatist did a U-turn and introduced a structural reform package known as Agenda 2010.
Although only halfway implemented, the reforms have already aroused contradictory reactions among Germans. A poll for Stern magazine found that every second voter accepts the reforms as painful but necessary, while the Infratest Dimap polling company found that two-thirds of Germans see the cuts as "socially unjust".
Opinion polls show that if there was an election tomorrow the opposition conservatives would win an overall majority, even though they propose reforms that are much more painful than Agenda 2010.
Last March Mr Schröder resigned the leadership of the SPD after five years. Freed of energy-sapping party politics, he said he would put in more hours on the reforms. In recent weeks, however, the cabinet conference room has started to resemble a restaurant kitchen with too many cooks.
The Foreign Minister criticises the Finance Minister's fiscal policy in an interview; the Finance Minister tells the Foreign Minister, during a press conference, to keep his mouth shut in future; the Economics Minister announces a new plan to raise tax revenue one day and buries it a day later.
"Disputes that once were cleared up in small groups now take place publicly, as if the government is sitting in the Big Brother house," remarks Mr Christoph Keese, commentator with the Financial Times Deutschland.
The central problem, he says, is that Europe's largest economy is being steered by lawyers, teachers and sociologists who are trying to get their heads round an economic problem that even economists could only understand after years of study.
"A lack of fundamental economic knowledge has led to a debate along the lines of 'Saving is good!' - 'No, rubbish, saving is bad!' What's lacking is a decisive figurehead who listens and weighs up all arguments and then decides a course. What's lacking is continuity and realistic planning."
Mr Schröder, who wanted to devote himself full-time to the reforms, is out and about in schools and on chat shows. On Wednesday he visited a company that makes anti-snoring devices.
Still, his remarks on the Stability Pact this week show that, while some doubt his political nous, his pragmatic instincts are as trustworthy as ever. He knows that time is running out to turn around the country and his party, and that something's got to give.
With just 23 per cent support, a historic low, the Social Democrats (SPD) face heavy defeats in the coming European elections and a dozen other state and local elections later this year.
A despairing Mr Schröder has ruled out further spending cuts or tax increases for the moment and has now come out against scuttling Germany's chances of recovery just to adhere to the Stability Pact.
Political observers in Berlin now wonder whether the escape-artist Chancellor, who just turned 60, is starting to get tired of his thankless task and if his escape from the Stability Pact might be his final, most dangerous, trick.