Germany positive it will meet 3% deficit target

The German government will publish a new report tomorrow sticking to its forecast that the economy will pick up this year. Its optimism contrasts with growing fears among economists that growth will be too sluggish for the government to keep its deficit low enough to qualify for the single currency.

The report will predict growth of 2.5 per cent this year, up from only 1.4 per cent last year. This will be enough, the government forecasts, for the gap between its revenues and spending to shrink to 2.9 per cent of GDP, just below the 3 per cent ceiling set in the Maastricht Treaty.

The tax reform package announced last week will, according to the forecast, boost growth by 0.5 per cent. Finance minister Theo Waigel said tax reform would boost competitiveness and job creation.

Yet the report is also due to admit that the unemployment rate will average 11 per cent for the year. Other forecasters are even more pessimistic, predicting that the number of jobless is unlikely to decline from its record level of 4 million.

"This level of unemployment could have a very bad impact on government finances," said Michael Lewis, an economist at Deutsche Morgan Grenfell.

On Friday trade unions said they would not accept an invitation to talks with Chancellor Helmut Kohl to discuss unemployment. "We are not prepared to take part in whatever political sham lies behind these talks," said a spokesman for the IG Metall union.

Union leaders are angry about welfare cuts introduced in the drive to trim the deficit. It is this anger that leads many experts to see strong growth this year as essential for public acceptance of economic and monetary union as well as for the sake of the budget.

The government's confidence that growth will revive enough for it to satisfy the Maastricht requirements this year, the key year for the decision as to which countries will qualify for EMU, is backed by the European Commission.