FRANKFURT (MNI) - It sends a problematic signal for Germany to further increase outlays and cut taxes next year given the major role it played in implementing rules for fiscal discipline within the European Union, the Bundesbank said in its monthly report.

The German central bank said it was of "vital importance" that Germany commit to the EU's Stability and Growth Pact, warning that the country's public finances will "worsen considerably" in 2010.

"Germany has a special responsibility" to implement European fiscal rules given that the role it played in initiating them, the bank asserted.

Given that a failure to consolidate its finances now would endanger Germany's ability to put the budget in order prior to the next downturn, "further increases in outlays and tax cuts [next year] without counter financing is a problematic signal," the bank warned.

"It is of vital importance," that "the commitment to European and national guidelines be fulfilled in Germany," the bank said.

"Next year, public finances should worsen considerably," the bank warned, noting that the national debt as a percentage of GDP will probably "exceed 75%," thus "reaching a new historic peak." The bank also predicted that the deficit as a percentage of GDP "will rise to approximately 5%" after being "slightly over" 3% this year.

These estimates on deficits are broadly in line with ones released last week by Germany's Council of Economic Advisors, the so-called "wise men".

The Bundesbank also warned of the monetary policy consequences of continually high deficits in the eurozone as a whole. "Such a development would not only involve problems with financial policy and the economy, but...the danger remains that markets form high inflation expectations because of budgetary positions that are not sustainable over the long-term," the bank observed.