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Bundesbank Says Merkel Must Cut Debt to Retain Market Trust

Chancellor Angela Merkel must maintain budget discipline if Germany is to keep the confidence of financial markets, the Bundesbank said.

Germany’s plan to cut its debt mountain to below 60 percent of gross domestic product from 81 percent will take “many years” to achieve and is being compromised by plans for higher spending, the Frankfurt-based central bank said in its monthly report today. “The consolidation course announced originally has been loosened” in the 2012 budget, it said.

The federal government in Berlin aims to marginally increase spending next year even as economic growth decelerates to about 1 percent from at least 3 percent in 2011, according to the budget. The step indicates that Merkel is counting on fewer transfers to social insurance coffers as unemployment falls, as well as tax revenue growth, the Bundesbank said.

Merkel must tackle a speedier reduction of budget outlays, the Bundesbank said. “Doing that would counter the risk of the debt burden growing and losing trust in the sustainability of German public finances.” Germany faces growing demographic problems, it said in the report.

Looser fiscal discipline may undermine the credibility of Merkel’s policy in the sovereign debt crisis spreading through the euro area. The German chancellor, who rejects unlimited bond purchases by the European Central Bank, has championed budget discipline as the primary tool to tame market volatility even as bond spreads breach records.

‘Cause for Concern’

The national deficit this year and in 2012 will probably fall to about 1 percent of GDP after reaching 4.3 percent in 2010, the Bundesbank said. While the scores show Germany would comply with the European Union’s limit of 3 percent, they mask Merkel’s aim to keep several economic stimulus programs running next year and to cut taxation, it said.

Germany’s debt level is a “cause for concern,” Luxemburg’s Prime Minister Jean-Claude Juncker said in a Nov. 16 interview syndicated to German newspapers, in which he also said the nation’s debt is higher than Spain’s.

Germany, one of five of the euro-region’s member states to have a AAA sovereign rating, had debt of 2.03 trillion euros ($2.73 trillion) in 2010 compared with 1.48 trillion euros in 2005, according to the Federal Statistics Office.

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