The German government approved an updated budgetary stability report yesterday, projecting growth of 1.25 per cent next year and a balanced budget by the euro-zone deadline of 2004, despite a threatening recession and new official figures showing unemployment at its highest level in three years.

However, the government tacked on a "risk" scenario to the report, envisaging growth of only 0.75 per cent next year which would push up borrowing and could push back the date of a balanced budget to 2006.

"In our current scenario, we still aim to present a balanced public budget in 2004. It will be a tough battle. And it assumes that the economy will not weaken further," said Mr Eichel yesterday.

A finance ministry spokesman said the programme foresees a "possible alternative scenario".

The report approved by the cabinet yesterday could leave Germany open to a reprimand from the European Commission similar to that given to Ireland earlier this year. The "realistic" scenario in the report envisages growth of 1.25 per cent as a result of the low price of oil, sinking inflation and low interest rates.

But a second "risk" scenario of only 0.75 per cent next year means the German public deficit might rise to 2.5 per cent of gross domestic product (GDP) instead of the 2 per cent Mr Eichel has been forecasting so far.

The "risk" scenario could lead to Germany breaching the stability pact guidelines which oblige euro-zone countries to keep their budget deficits under 3 per cent of GDP and to balance their budget by 2004.

"We are following with great interest what is happening in Germany," said Mr Pedro Solbes, the Economic and Monetary Affairs Commissioner. Other diplomats were less diplomatic. "More than 3 per cent is the forbidden zone. But the problem exists and we have to solve it." The European Commission already assumes the German economy will grow by only 0.7 per cent next year and has forecast the country's budget deficit will rise next year to 2.7 per cent of GDP.

However, Germany's "risk" scenario could become a reality if the threatening recession becomes a reality and unemployment continues to rise.

Official figures released yesterday showed there were 3.779 million people out of work in Germany in November, a rise of 17,000 since October when seasonally adjusted, and an increase of almost 144,000 from the same month last year. Mr Bernhard Jagoda, the president of the Labour Office, admitted that unemployment could exceed four million during the winter.