Germany to take on record debt

25th June 2009, Comments 0 comments

Europe's biggest economy will be forced to take on 310 billion euros more debt over the next four years -- the highest amount since the Federal Republic was founded 60 years ago.

Berlin -- Germany's finance minister said Wednesday Berlin would break EU budget rules until 2013 or 2014, unveiling a record level of borrowing as the country reels from its worst recession in decades.

Peer Steinbrueck said Europe's biggest economy would be forced to take on 310 billion euros (430 billion dollars) more debt over the period of 2009 to 2013 -- the highest amount since the Federal Republic was founded 60 years ago.

"Based on the current economic forecasts, we will not be below the upper deficit level until 2013 or 2014," Steinbrueck told the Frankfurter Allgemeine Zeitung daily in an interview.

According to EU rules, member state budget deficits are not allowed to breach three percent of gross domestic product (GDP), while a country's public debt is not permitted to exceed 60 percent of GDP.

Steinbrueck said that Germany's deficit levels would be "around four percent" this year, rising to "just below six" percent in 2010 -- in line with the commission's own forecasts.

He said he therefore expected Brussels to begin disciplinary procedures against Germany at the end of this year or the beginning of next year. Most countries in the 27-nation EU are also expected to break the rules.

"The recession is hitting Germany harder than we expected," he told reporters, adding that the country's export-driven economy was suffering more than others from the global slump in demand following the financial crisis.

"No other country is so directly ... hit by what is happening in the global economy," he added.

He also said that new borrowing next year would almost double to 86.1 billion euros, possibly rising to as much as 100 billion euros when measures designed to fight the crisis are included.

The budget, agreed in cabinet earlier Wednesday, is likely to be amended by a new government after German elections on September 27.

Steinbrueck insisted that Germany would return to a path of fiscal responsibility after the recession had passed.

"After the crisis, Germany must go back to an austerity path," he said.

This was important, not just to boost confidence among citizens, but also to maintain Germany's "triple A" rating in the financial markets.

If Germany's rating were to be downgraded, the cost of financing its debt mountain would be pushed up "enormously," he said.

Steinbrueck also said that measures taken by central banks to pump money into the economy have presented "medium-term inflation risks that must be taken seriously."

Nevertheless, "the central banks have been doing exactly the right thing," he said, adding that banks in Germany should not complain of a credit squeeze when the European Central Bank has been providing unlimited cash at record low rates.

Earlier Wednesday, the ECB lent eurozone banks a record 442 billion euros at an interest rate of one percent for one year in a further bid to ease credit conditions for businesses and households.

Richard Carter/AFP/Expatica

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