Germany ‘on course to meet EU fiscal rules’ (FT)

Germany’s public finances have been brought under control, setting the country on course to comply with European Union fiscal rules for the first time in five years, the government declared on Wednesday. The brighter outlook for Europe’s largest economy was also boosted by data suggesting the football World Cup was helping the upswing.

Peer Steinbrück, finance minister, said Germany was returning to its “responsible role” in EU fiscal affairs, with the budget deficit likely to fall to 3 per cent of gross domestic product this year and to 2.5 per cent in 2007.

The budget turnround reflected the strength of German growth, which could approach 2 per cent this year – high by the country’s recent standards – but could slow the pace of expansion in months ahead. “It is a good year, yes, but the degree of fiscal tightening is enormous,” said Jörg Krämer, economist at Commerzbank.

Over the past five years, Berlin has clashed repeatedly with Brussels over its budget deficit. Mr Steinbrück expected the European Commission would soon drop any formal steps against Germany.

France has also reported progress in restoring its fiscal record.

Separately the German minister said his planned corporate tax reforms would in the long term cut companies’ overall tax bills by up to €5bn ($6.4bn £3.4bn) a year.

The reform aims to cut average nominal tax rates by nine percentage points to around 30 per cent from 2008.

Mr Steinbrück’s comments came as figures showed German service sector growth had accelerated sharply last month.

NTC Economics said the “business activity” index it publishes with the Royal Bank of Scotland was at the highest since the survey began in June 1997.

The jump was attributed largely to the World Cup, which boosted activity in sectors such as hotels and transport.

Across the eurozone, service sector growth was at a six-year high, confirming the robustness of the economic recovery in the 12-country region.

The European Central Bank will be watched closely on Thursday for signals about expected further rises in interest rates, although its main rate is expected to be left unchanged at 2.75 per cent.

The precise economic impact of the World Cup on Germany remains unclear – especially after its national team lost to Italy on Tuesday night. Chris Williamson, economist at NTC Economics, said some activities such as home improvements would “be affected by people’s obsession with football”.

A sharp fall in German high street sales in May – in the run-up to the World Cup – largely explained unexpectedly weak eurozone retail sales figures on Wednesday, which were 0.6 per cent lower than in April.

Copyright The Financial Times Limited 2006