The decision of the European Commission this week to grant Germany an extra two years to balance its budget has prompted another round ofhand-wringing about the financial health of Europe's biggest economy,writes Derek Scally in Berlin

It's not Hans Eichel's fault that he's been called "a paper clip with glasses". It's just that Germany's finance minister has the least fun job in the government, particularly at the moment. While Chancellor Gerhard Schröder savoured his re-election victory with a glass of whiskey and a cigar last weekend, Mr Eichel had to go straight back to work. His task: to try to put a positive spin on his report on the German economy for euro-zone finance ministers.

The report he filed on Tuesday made for sober reading. The budget deficit in the euro-zone's largest economy would jump to 2.9 per cent of gross domestic product (GDP) this year, he said. This new forecast was 0.4 per cent higher than the mark set earlier by the finance ministry, the result of the flood catastrophe in August and the weakening economic situation.

But Mr Eichel didn't get the slap on the wrists he was expecting from Brussels for coming so close to the 3 per cent ceiling laid down in the Stability and Growth Pact for euro-zone members. Instead, the European Commission announced it was giving Germany, along with France and Italy, an extra two years to balance its budget.

The decision sparked uproar around Europe at what smaller countries said was special treatment for larger euro-zone members. Surprisingly, it has caused mixed reaction in Germany as well. Coming so soon after election day, the decision has also prompted the latest round of hand-wringing in Germany about the state of the economy.

Mr Eichel welcomed the move and agreed to the demand that he make annual cuts of at least 0.5 per cent in Germany's structural deficit over the next few years. He rejected claims that the move was a "softening" of the stability pact, pointing out that the 3 per cent ceiling was intact. "It makes the stability pact more believable," he said.

Mr Eichel was backed by the head of the influential Institute for Economic Research. "I see it as a must in order to save the stability pact," said Mr Klaus Zimmerman. He said the Commission made the right decision now, rather than face a loss of faith in the pact later when the euro-zone's largest economies missed the mark. The decision would give a much-needed growth boost to Europe's economies, including Germany's, he added.

Business leaders were hoping for an economic boost from the election of a new conservative government last weekend. The Christian Democrats (CDU) had promised to dismantle and rebuild Germany's economic engine, removing what industry views as expensive add-ons like the ecological tax on fuel.

Mr Michael Rogowski, chairman of BDI, the German industry federation, said Germany had developed in the direction of a social economy for too long: "A more market-based economy and more corporate freedom" is what was needed, he said. "The SPD is so enveloped by the unions that it will be difficult for the party to break free."

A new United Nations report says that decreasing numbers of foreign investors view Germany as a viable place to do business. Direct investment dropped by 84 per cent to €32.6 billion last year, according to the report, compared with an average global fall-off of 59 per cent, caused by the September 11th attacks.

The reasons for Germany's poor performance are homemade and age-old, according to the Federation of German Wholesale and Foreign Trade (BGA). "The problems include the encrusted labour market, the hefty tax burden, the overloaded tax state and the winding and complicated work approval process," said Mr Anton Börner, BGA president, in a statement.

The economy is the biggest challenge to the new government, and one of the greatest causes of concern in the euro zone.

Mr Schröder ended his last term of office on a dud economic note. The German economy ended last year in recession and has only barely recovered since. His promise to bring down unemployment to 3.5 million went unfulfilled as the number of people out of work steadily rose back to 10 per cent, where it was when he took office in 1998.

Earlier this year, when it appeared that the economy would be the deciding election issue, Mr Schröder set up a panel of experts headed by Volkswagen executive Mr Peter Hartz to push through changes to Germany's employment market and welfare system.

In the end, the election was decided, not on the economy, but on last month's floods and Germany's stance towards military action in Iraq. But now that the election dust has settled, business leaders are looking for movement on the economy.

"Words must now be followed by action," said Mr Hans-Joachim Körber, chief executive of Metro, Germany's largest retailer. "Top of the list are the simplification of the tax system, a clear reduction of non-wage labour costs and reform of the over-stretched social security system, flexibility in the labour market and a qualitative improvement of our education system," he said.

It's a daunting list of demands, made all the more difficult by a stronger Green party, buoyed by its best-ever election result. Coalition talks have only begun but already the Greens have made a renewed push for further promotion of renewable energy and an increase in the ecological taxes on fuels, the pet hate of industry.

Mr Edmund Stoiber, the defeated conservative candidate, has taken on the role of official vulture, circling over the Reichstag in Berlin. "The Schröder government will only be able to govern for a very, very short time. With this Red-Green coalition, Germany won't return to economic health," he said, predicting that he would be chancellor within a year.

But Mr Schröder has no plans for an early exit and has pinned his hopes on the 340-page Hartz Report, presented before the election and now awaiting implementation. If implemented in full, as Mr Schröder has promised, the Hartz report could be a watershed in German labour politics and the shot of adrenalin the economy needs.

The report calls for a shake-up of the federal employment office, widely seen as an overly bureaucratic behemoth that hinders rather than helps job-seekers find work. Already private employment agencies, previously kept in a restrictive legislative box, have been let compete on the German market with state employment offices.

Cash-strapped Mr Eichel was undoubtedly pleased to read that the proposals will cut the average time workers spend between jobs from 33 to 22 weeks, saving him €19.5 billion a year in unemployment benefits. It's money he urgently needs to save: officials in the finance ministry speak openly of a €15 billion hole in Germany's public finances for this year.

More interesting are the rumours that Mr Eichel is planning to do a Charlie McCreevy and announce a package of up to €5 billion in budget cuts in the election afterglow.

The rumours have done little to dispel the economic gloom hanging over Germany since the election. Stocks dropped nearly 5 per cent in Monday morning trading in Frankfurt as news of the government's re-election sank in. The mood hasn't been improved by the prediction from an influential economist of more of the same in its second term. "The economic politics in Germany are going in the wrong direction at the moment and it's to be expected that it will continue that way," said Mr Joachim Scheide, of the Institute for World Economy in Kiel.

It's going to be a bleak winter for Mr Eichel as he tries to hold the government's finances together. It's not easy being a paperclip.