The European Central Bank president told Germany yesterday to live up to its fiscal promises and cut borrowing to boost investor confidence.Mr Wim Duisenberg said the 2004 budget plan drawn up by Mr Hans Eichel, finance minister, was a "cause for concern" because it would make government debts rise when they should fall.
His rebuke came after Mr Eichel revealed plans that will require a steep rise in net new borrowing to 23.8 billion, and are expected to lead to Germany breaching European Union budget rules for a second year.
Germany's budget deficit in 2002 exceeded the 3 per cent of gross domestic product limit set by the stability and growth pact and is expected to do so again this year and next.
The finances of the euro-zone's biggest economy are expected to deteriorate further if Berlin brings forward €18 billion of tax cuts next year. Mr Eichel deflected questions about cuts until this weekend's rare conclave of ministers and coalition party leaders.
Reacting to the plans, Mr Pedro Solbes, the EU's monetary affairs commissioner, said Berlin could not count on the commission's support if fiscal rules were breached.
But amid fears Germany's stagnating economy, already in technical recession after two quarters of contraction, could sink into a deflationary spiral, Berlin has little option but to ease budgetary reins to stimulate growth.
Mr Robert Prior of HSBC said: "It is the only weapon it has left ... it cannot cut interest rates and it cannot devalue."
But Mr Duisenberg said Germany needed "to do everything to generate confidence" to overcome its economic weakness. - (Financial Times Service)
