The Bundesbank has warned that Germany's budget deficit could rise to 2.7 per cent of gross domestic product this year as the euro zone's largest economy remains on a shaky footing. The projection does not include the cost of repairing damage done by the recent floods, according to the bank, which warned the government had no room to increase fiscal expenditures if it was not to breach the terms of the European Growth and Stability Pact.
Yesterday's forecast from the Bundesbank is slightly higher than the government's forecast of a 2.5 per cent deficit, and takes into account falling tax revenues and rising social welfare costs.
But the report does not include the clean-up costs from recent flooding in eastern Germany, estimated to be at least €15 billion, which could put further strain on Berlin's attempts to control its budget deficit. The Chancellor, Mr Gerhard Schröder, has declined to comment on the financial implications of the clean-up costs.
"This discussion is purely theoretical and I have no interest in it at the moment," he said on Sunday after meeting European Commission president Mr Romano Prodi.
However, Mr Prodi reminded Mr Schröder that the flood disaster did not relieve Germany of its obligations under the stability pact.
Yesterday a senior finance ministry official in Berlin told the Financial Times Deutschland: "We don't know how great the costs from the flood damage will turn out to be. For that reason we cannot say whether we will undershoot or overshoot the [stability pact] guidelines."
Mr Hans Eichel, the finance minister, rejected speculation that Germany might breach the 3 per cent ceiling.
"We stand by the stability pact without ifs or buts," he said yesterday.
Ms Michaele Schreyer, the European Commissioner responsible for the budget, said yesterday that talk about Germany breaching the stability pact was was "completely inappropriate".
The Bundesbank report painted a gloomy economic picture for the government with just a month to election day. Tax revenue declined 5.2 per cent to €189.4 billion in the year to June, and the bank predicted that the year's full tax revenues would also be below estimates.
The report said that the German economy was still suffering the effects of the economic slowdown, predicting that unemployment would remain above four million, or 9 per cent, for the rest of the year.
"One cannot speak of a firm upswing because the readiness of firms to invest is still characterised by caution and restraint," the bank said.
The report estimated that the German economy grew by 0.25 per cent between April and June compared with the previous three months. That was a slight rise on first-quarter growth of 0.2 per cent, the first growth after a mild recession in the second half of last year.
