The Globe and Mail Tuesday, June 10, 1997 Budget crisis grips German government Kohl urged to step down as coalition backing his government near collapse By Alan Freeman European Bureau The three-party coalition supporting the government of German Chancellor Helmut Kohl appears close to collapse over its inability to agree on how to fill a hole of 20 billion marks in this year's budget. A split would prompt an early election. Germans are not scheduled to go to the polls until the fall of 1998. "I think the situation has never been as serious as it is right now," said Jens van Scherpenberg, senior research fellow at the Stiftung Wissenschaft und Politik, a leading German think tank. Escalating the growing malaise in the centre-right government that has ruled Germany for 14 years, Helmut Schmidt, Mr. Kohl's influential predecessor as chancellor, yesterday called on Mr. Kohl and his finance minister, Theo Waigel, to resign because of fiscal mismanagement. "The only thing left to do is to make room for people with new ideas," Mr. Schmidt, a Social Democrat, told German television. Mr. Kohl threatened to quit several times in the past week over the budget crisis, newspapers here reported. Mr. Kohl's credibility has been severely bruised after an awkward effort last week by his finance minister to use a revaluation of the country's gold reserves to fill the budget gap. The government was forced to retreat from the effort after the Bundesbank, Germany's central bank, and several of the government's critics attacked the measure as an accounting trick. Mr. van Scherpenberg noted that although Mr. Kohl has been under fire in the past, this time the problems are more profound. In previous crises, Mr. Kohl was frequently criticized by the news media and the intelligentsia, but he found backing with the public, a situation that has changed. "I think he's out of tune with the man in the street, and that is different from earlier times," said Mr. van Scherpenberg, who thinks that many Christian Democrats now believe Mr. Kohl will be a liability in next year's election, when he will try for a fifth term as chancellor. Germany's weak economy doesn't help matters. The latest jobless statistics show that the seasonally adjusted unemployment rate jumped to 11.4 per cent in May from 11.2 per cent in April. More than 4.3 million Germans are out of work. The increase in unemployment not only hurts Mr. Kohl politically, it deepens his government's fiscal problems by forcing a rise in spending on jobless benefits. All of this makes it even more difficult for Germany to meet the Maastricht Treaty rules required for membership in the proposed European single currency, known as the euro. The rules stipulate that nations wishing to join may have deficits of no more than 3 per cent of gross domestic product. The Free Democrats, the smallest of the coalition parties with 6.9 per cent of the popular vote in the 1994 election, oppose making up the budget shortfall through any tax increases, including a proposed hike in gasoline taxes. "Opposition is dangerous, but raising taxes is fatal," said Otto Graf Lambsdorff, honorary chairman of the Free Democrats. The party's deputy chairman was quoted as saying that if the government insists on raising any taxes, "then we'll have to leave." "It's a real deadlock and a real mess," Mr. van Scherpenberg said. "I can't see any face-saving way out for anybody unless somebody loses badly, and it will be the FDP if taxes are raised." The Free Democrats obviously think the public is on their side. Focus, a German news magazine, carried an opinion survey on the weekend showing that 81 per cent of Germans oppose higher taxes as a way of bridging the budget gap. On the other side of the coalition spectrum is the Christian Social Union, the Christian Democrats' sister party in Bavaria. This party remains the most outspoken supporter of the need to maintain the strict requirements of Maastricht. The Christian Socialist Premier of Bavaria, Edmund Stoibler, has suggested that it would preferable to delay the launch of the currency rather than accept a watering down of the criteria, even though Mr. Kohl has repeatedly refused to even broach the idea of a delay. The European Monetary Union is on shaky ground elsewhere, too, as the new French Socialist government has called for a "period of reflection" on an agreement designed to punish member countries that exceed budget-deficit limits. The demand was seen as weakening prospects for the euro and was blamed for a decline in prices on European stock exchanges yesterday and for a slide in the value of the French franc. Mr. Kohl meets new French Prime Minister Lionel Jospin at one of the periodic Franco-German summits, scheduled to take place in Poitiers, France, on Friday.