Experts slash German growth forecast

Mr Schröder last weekend announced his plan to encourage consumers to spend more by reducing income tax starting from next year. Analysts agree that such a cut threatens to enlarge the country's already existing budget holes.

These statements, as expected, have prompted fresh warning signals from Brussels.

"The Commission expects that Germany will respect the EMU policy framework. A general government deficit above 3% of GDP in 2004, for the third year in a row, would be incompatible with our common budgetary rules," Monetary affairs Commissioner Pedro Solbes said in a speech at the International economic conference in Berlin yesterday (1 July).

In 2002, Germany breached the Euro-zone rules that proscribe a budget deficit of more than 3% of GDP and with German Finance minister Hans Eichel admitting that the government's own forecast for 2003 is too optimistic - Berlin will most likely breach the terms of the so-called Stability Pact again this year.

Mr Solbes called this an "unsatisfactory performance".

However, he welcomed the German "reform debate in full swing", particularly mentioning the governments' recent reform plan in health care, social security and employment system. The so-called Agenda 2010 is a step in the right direction, Mr Solbes said.

Over 4 million people in Germany are cueing for unemployment allowances.

Recognising the general mood, German politicians have promised to join forces in order to boost the country's economy.

The German opposition party, CDU/CSU, has promised to support Schröder's tax cut plan. According to German media reports this morning, CSU leader Edmund Stoiber and CDU's Angela Merkel have written a joint letter to Schröder, saying that the opposition will not block the vote in the Bundestag.

The German finance ministry is planning to hold the first talks on how to manage the proposed tax cuts with the federal governments today (2 July).