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Germany boasts balanced budget, resists euro zone stimulus

By Paul Taylor

LONDON, Jan 13 (Reuters) - Germany boasted on Tuesday it had balanced its budget for the first time since 1969 and pressed euro zone partners to follow its austere example rather than try to stimulate their stagnant economies with borrowing or central bank money-printing.

Berlin had been aiming to achieve the so-called "schwarze Null" (zero deficit) in 2015, but strong tax revenues and lower debt service costs due to rock-bottom interest rates helped it meet the goal a year early in 2014, the finance ministry said.

Chancellor Angela Merkel's government has rebuffed calls from EU partners led by France and Italy and international organisations such as the IMF and the OECD to spend some of the fiscal windfall on growth-promoting public investment.

The announcement came nine days before the European Central Bank may decide to launch large-scale purchases of euro zone government bonds in an effort to boost growth and avert deflation in the 19-nation currency area.

Headline inflation fell below zero in December, and core inflation, excluding energy and food, was stuck at 0.7 percent, far below the bank's target of just below 2 percent. Persistent low inflation makes it harder for highly indebted governments and households to reduce the burden.

ECB executive board member Benoit Coeure told German newspaper Die Welt that the bank was ready to take a decision when it meets on Jan. 22. However, he held open the possibility of a delay, while saying Greece's general election on Jan. 25 would not influence the bank's monetary policy path.

"The discussion is far advanced," said Coeure. "Last week, we discussed a lot of technical details."

In a Reuters poll this week, eight out of 20 money market traders forecast the ECB's Governing Council would launch bond purchases this month, with almost all the rest expecting an announcement at the next ECB meeting in March.

Germany's influential Bundesbank and conservative financial establishment oppose so-called quantitative easing (QE) - creating money to buy securities and stimulate the economy.

They question the need for monetary stimulus at a time when falling oil prices are bringing an economic boost, and argue that buying government bonds raises legal and moral hazards, and could bring future losses for German taxpayers.

Whether the ECB presses ahead with full-blooded QE despite German misgivings depends partly on a legal opinion to be delivered in the European Court of Justice on Wednesday. This concerns another plan which ECB President Mario Draghi unveiled after he promised in 2012 to do whatever it takes to save the euro, but never launched.

If the court's legal adviser finds the bank exceeded its treaty mandate by creating the unused OMT plan to buy the bonds of troubled euro zone countries that accept a bailout programme, or suggests curbs on such debt purchases, he could make it harder for Draghi to push through QE.

Some ECB sources expect the bank's Governing Council to approve a limited form of QE in which the ECB would buy some bonds centrally but national central banks would do most purchases of their own countries' bonds at their own risk.


The European Commission set out detailed rules on Tuesday for a planned 315 billion euro investment programme over the next three years, involving no new public money in deference to German objections.

Public investment and structural reforms could win limited leeway for countries breaking EU budget rules, it said. That reduces the likelihood of tough penalties on France or Italy, the euro zone's second and third largest economies, when their fiscal plans are reviewed again in March.

Countries that put capital into a proposed European Fund for Strategic Investment would not be penalised if it tips them over the EU's deficit limit of 3 percent of gross domestic product. However, those that already have an deficit in excess of the ceiling would win no indulgence.

The mood of self-congratulation in Berlin over the balanced budget made any easing of fiscal policy seem unlikely, even though the German economy is expected to slow this year.

Far from using the leeway to invest more in creaking public infrastructure or cut taxes to stimulate weak domestic demand, politicians in Merkel's conservative CDU party said the government should now focus on paying down the country's debt.

CDU deputy parliamentary floor leader Michael Fuchs told Handelsblatt that Germany still had huge a debt pile to clear currently at around 75 percent of GDP, and needed to keep saving as a duty to future generations.

CDU general secretary Peter Tauber said the "historic success" sent a clear signal to the rest of Europe that Berlin was leading by example and spending only money in its coffers. "This marks a turning point in financial policy: We've finally put an end to living beyond our means on credit," he said.

Germans still harbour deep-seated fears of inflation due to the hyperinflation of the 1920s that wiped out an entire generation's savings, and many have an aversion to debt.

Christian Schulz, economist at Berenberg Bank, said the government had staked a lot of credibility on balancing the budget and would reap a political dividend from voters "who are very keen on the German government not borrowing more".

While more spending could boost domestic demand and imports from the rest of Europe, Schulz said it was unlikely to be at levels that could significantly affect euro zone growth.

(Additional reporting by Michelle Martin and Alexandra Hudson in Berlin and Jan Strupczewski in Brussels; Writing by Paul Taylor; editing by David Stamp)