FRANKFURT (MNI) – Germany’s public deficit should remain well below
5% of GDP this year and could fall to 4% next year, thereby increasing
the chances that the 3% ceiling can be respected by 2012, the Bundesbank
said Thursday.

However, stronger than expected economic growth must not serve as a
pretext for relaxing budget consolidation efforts, and more concrete
measures are needed to bring public finances into balance by 2016, the
German central bank said in its Monthly Report.

Indeed, since consumption and wages will lag overall economic
growth, the stronger activity this year will have only limited impact on
the deficit, which will widen from last year’s 3.1% as a result of
declining revenues and expansive fiscal policy, it said.

Nevertheless, the deficit “should come in lower than initially
feared and remain well below 5%. The debt ratio, which had already risen
sharply to over 73% of GDP last year, will continue to mount.”

As stimulus measures are unwound next year, economic conditions and
spending cuts should roll back the deficit to 4%, it said. “The
additional consolidation measures announced in June could reinforce the
decline. However, the debt ratio should rise further as a result of the
still high deficit.”

While the 3% deficit threshold could be attained by 2012, the state
of public finances will remain worse that before the crisis and the goal
of budget balance still “far” away, it reminded.

The central bank welcomed the recent savings measures and the
government’s “clear commitment” to fiscal consolidation. “What is
important now is to avoid the cardinal error of past years” — namely to
take positive economic surprises as an excuse to dilute
deficit-reduction plans, it said.

Instead, improved economic prospects should be used “to reach
deficit targets earlier.”

In order to balance the books by 2016, further policy action will
be needed, the Bundesbank stressed, noting that spending will have to be
cut further and there is “practically no leeway” in meeting debt
targets. Stronger growth this year will have little impact other than
lowering the starting point for the reduction of the structural deficit,
it said.

The federal states will also have to reduce their “high structural
deficits” in the coming years in order to assure that overall finances
return to balance by 2016, it reminded.

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

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