Germany's budget deficit will rise to 3.8 per cent of gross domestic product (GDP) this year, breaching European Union guidelines for the second year running, according to an official forecast sent to the European Commission.
German finance minister Mr Hans Eichel said the weak economic situation and high unemployment were to blame for the deficit, which is well above the 3 per cent limit set out in the Stability and Growth Pact.
Germany will also breach the 60 per cent of GDP level of debt allowed by the pact, according to the forecast, with total debt of 63 per cent, according to the forecast.
A ministry spokesman said Berlin was optimistic of bringing the deficit under the 3 per cent ceiling next year. "Important economic indicators are already pointing upward," the spokesman said, referring to recent increases in business and consumer confidence.
Next year's economic performance based on 2 per cent growth was "attainable", the ministry said.
In fact, the economy's performance depends largely on a series of reforms being prepared by the government, including labour market reforms and tax cuts worth €15 billion next year.
The announcement of the deficit was long anticipated although, at 3.8 per cent, it was higher than expected.
In May, Mr Eichel said only a "miracle" would prevent a deficit of more than 3 per cent, while last month the ministry was forecasting a deficit of 3.5 per cent. On Monday, the ministry said reports of a 3.8 per cent deficit were "highly creative speculation".
Yesterday's announcement came hours after Chancellor Gerhard Schröder said he believed "many countries" shared Berlin's desire for the stability pact's rules to be modified.
"We don't want to leave the stability pact but we want to interpret it in an economically sensible way," said Mr Schröder to foreign correspondents in Berlin.
He said his view was "shared by the French government and I haven't seen Italy taking a different position. We have to make sure that both goals - economic stability and growth - are balanced in a way that is warranted by current circumstances," he said.
French Prime Minister Mr Jean-Pierre Raffarin said this week that France would continue to support the stability pact but would like the European Commission to be more "flexible" in its interpretation.
Mr Gerassimos Thomas, spokesman for EU Monetary Affairs Commissioner Mr Pedro Solbes, said Germany's 3.8 per cent deficit forecast was "very close to our forecast".
"We are looking... for the implementation of the different reform measures and, if this comes true, we still see good possibilities for the target of 3 per cent [of GDP\] to be achieved," he said.
Countries that repeatedly break EU budget rules risk fines of up to 0.5 per cent of GDP.
Many smaller countries, including the Republic, which have worked to balance their budgets back the Commission's position and dismiss any talk of loosening the stability pact's criteria.
