The head of the Bundesbank in Germany has warned that the country's economy might stagnate this year with zero growth.

The warning came as Chancellor Gerhard Schröder announced plans to tax interest on savings accounts and an amnesty for investors who return undeclared funds to Germany.

"The only way of describing consumer and investor confidence in Germany is bad. The country is in a confidence trough," said Mr Ernst Welteke yesterday. He expects Europe's largest economy to grow between zero and 0.5 per cent this year.

Mr Welteke, a member of the European Central Bank (ECB), said there was "still room for manoeuvre" on interest rates following last week's interest rate cut. The German economy grew by just 0.6 per cent last year, one of the weakest showings in the euro zone, and threatens to drag down the rest of the euro zone next year, according to the Economist Intelligence Unit.

The economy could receive a much-needed boost next year with plans to introduce a single 25 per cent tax on savings account interest, simplifying the existing complicated system.

Mr Schröder also proposed introducing a two-year window for Germans to bring undeclared funds back into the country from the tax havens of Switzerland and Liechtenstein without risk of prosecution.

"We want to allow those who have not been honest a way back into the system," said Mr Schröder at a press conference yesterday.

Mr Hans Eichel, the finance minister, said up to €100 million could return to the country under the amnesty, which would be subject to a 25 per cent levy next year and 35 per cent in 2004. Earlier this year, Mr Eichel rejected such an amnesty, saying it would be unfair to honest taxpayers.

But faced with a €30 billion budget shortfall next year, he has been casting around for new sources of revenue in recent weeks. "We think it's better that this money is invested and put to work in Germany," said Mr Schröder. He hopes it will end a politically damaging discussion on the introduction of a wealth tax, rejected by Mr Schröder, but favoured by several state leaders.

The new proposals would also abolish many of Germany's bank secrecy laws as part of an EU-wide effort to curb tax evasion.