Optimism about a sharp recovery in the euro-zone economy grew yesterday after official reports of falling unemployment in Germany and a much-improved budgetary outlook in Italy.

After Italy reported its second consecutive monthly budget surplus, the Rome government indicated it was increasingly confident it could meet its original deficit target for the year of 2 per cent of gross domestic product.

Signs of renewed growth in the euro zone are likely to be welcomed by the British government, which wants to find ways of selling future membership of European monetary union to a sceptical electorate.

At the end of May, European Union finance ministers upset markets by allowing Italy to overshoot its target under the European "stability pact", which underpins fiscal discipline in the 11-member euro zone. The move also helped weaken the euro against the dollar.

But recent positive economic data from Italy, France and Germany, as well as encouraging industrial output figures from the euro zone as a whole, is helping to restore investors' confidence in the single currency.

Mr Gerhard Schroder, the German chancellor, yesterday said Germany unemployment should fall by 200,000 this year and growth in 2000 could be higher than the 2.5 per cent forecast.

The Italian Treasury said the August budget surplus totalled 6,500 billion lira (€3.36 billion), compared with a surplus of L4,899 billion in August 1998. The latest figure follows a record monthly surplus of L35,400 billion in July and confirms higher-than-expected fiscal revenues from the government's campaign to stop tax evasion.

The improvement also reflects slightly better economic growth, and the continuing effect of low interest rates on the country's substantial debt service burden.

Although many officials consider in private that Italy has a strong chance of meeting its original 2 per cent deficit to GDP target this year, in public they are cautious. Mr Piero Giarda, a Treasury under-secretary, yesterday said the positive performance confirmed a 2.4 per cent deficit to GDP target could be reached this year.