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Budget deficit points to pain ahead

Germany breached the EU's budget deficit limit of 3% of GDP over the first six months of this year and will almost certainly break the terms of the European stability pact that underpins the euro for the third year in a row. In fact, the government managed to run a 4% budget deficit over the first half of this year, slightly higher than the 3.9% for the end of 2003, federal statistics office Destatis revealed last month.

Under the terms of the Maastricht treaty, eurozone members are supposed to keep their deficits below 3%, but weak growth and stalled reforms have left the German government desperately short of money.

Dieter Vesper, senior economist with the German Institute for Economics, says: ?Government spending barely increased hence the deficit increase is essentially a revenue problem. The weak recovery of the economy combined with tax cuts has lowered the tax revenue.?

Exports are offering some buoyancy but recovery is being hurt by continually falling consumer demand at home. The government was hoping the economy would grow by a little over 1% this year, but even this is being threatened by soaring oil prices.

GDP expanded by 0.5%

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