BERLIN (MNI) – German federal net new borrowing this year could
stay well below the E80.2 billion projected in the government’s budget
bill, the Bundesbank said in its latest monthly report released
Wednesday.

“The deficit could remain markedly under E70 billion,” the central
bank predicted.

It pointed to the recent upward revision of tax estimates, higher
than expected revenue from the auction of UMTS frequencies, lower debt
servicing costs, and lower spending due to the better employment
development.

“The deficit ratio could reach a level of almost 5% [of GDP],” the
Bundesbank wrote. The government in its latest Stability Report
forecast a budget shortfall of 5.5%. German total public debt might also
stay below government assumptions this year, the report noted.

For the coming year, the Bundesbank sees a “limited decline” of the
public deficit in the offing given that several economic stimulus
programs will end then.

Yet, the central bank cautioned that due to growing debt from an
already high level “a rise of the currently very low interest rate level
would lead swiftly to extra [debt service] expenditures in the
billions.”

Thus, a swift consolidation of public budgets must have priority in
Germany, the Bundesbank urged. Cutting the federal deficit to 0.35% of
GDP by 2016, as stipulated under the country’s debt limitation rule, “is
an extraordinarily heavy challenge,” it observed.

There is, thus, no leeway for any further burden on the budget in
the coming years, the Bundesbank said. Chancellor Angela Merkel recently
backed down from the tax cut promises made in last year’s election
campaign.

The Bundesbank noted that the recent problems in the Eurozone had
shown that dramatic consequences can result from unsound budget
policies. The fiscal crisis “has underlined the important role of
Germany as a stability anchor” in the Eurozone, it remarked.

The EU fiscal rescue package is justifiable due to the acute
systemic threats, the Bundesbank acknowledged. However, the measures
still weaken the individual responsibilities of member states for their
budgets and “damage the institutional foundation of the Monetary Union,”
it argued.

In turn, a far-reaching tightening of European rules is now needed
to increase incentives for sound budget policies, the central bank
urged.

“Otherwise the goal set in the rules of the Treaty on the
Functioning of the EU, to protect monetary policy against unsound
budgets, would be endangered, ” the Bundesbank warned.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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