EU on warpath as budget deficits to shatter limits

The European Commission issued a flurry of budget deficit rebukes yesterday as its forecasts showed that half of the eurozone's dozen members would not qualify for euro entry if they applied this year.

Italy, Greece, the Netherlands and Portugal are seen running 2004 deficits above three per cent of gross domestic product, flouting the Stability and Growth Pact on budget discipline, as Germany and France will do for the third year running.

The Commission was toughest on Italy, calling for it to be shown a "yellow card" over its rising deficit and signalling Rome should balance tax cuts with spending curbs to respect the pact's deficit limit, which is the same as that for euro entry.

Italy has led growing calls for change to the pact and was quick to predict it would escape punishment as Germany and France did last year when they convinced eurozone peers to suspend disciplinary action despite repeated deficit breaches.

That decision and the growing number of states straining EU deficit limits have dented the pact's credibility. But the Commission insisted some rules were better than none and pointed to Germany's valiant efforts to curb its deficit.

"It's true that too many countries are breaching the three per cent," European Economic and Monetary Affairs Commissioner Pedro Solbes told a news conference that was his swansong before he returns to Spain to become his country's economy minister.

"I am not satisfied but we are better off today than we were before," he added.

He said Brussels would draw up reports on the Netherlands and euro outsider Britain for breaking the EU deficit cap in 2003, but indicated London would be quickly excused as its shortfall is seen falling back below three per cent in 2004.

Slow growth has swollen deficits and the Commission once again shaved its 2004 forecast, warning that the balance of risks was on the downside as it trimmed its prediction for the eurozone to 1.7 per cent from 1.8 per cent previously.

Consumer confidence was still fragile - not least due to fear of terrorist attacks heightened by the Madrid bombings in March. But the Commission stuck to its expectation that growth would pick up to 2.3 per cent in 2005. It also said the eurozone could be expected to create half a million jobs this year and twice as many next year.

But despite forecasts of stronger eurozone growth, France, the Netherlands, Italy and Portugal are set to break the EU deficit cap again in 2005 unless they take more deficit-cutting steps, and the latter two risk a still higher deficit next year.

Mr Solbes had stern words for Italy, which he said was running out of one-off steps to flatter its deficit and was failing to cut debt, the highest in the EU at 106 per cent of GDP.

It also warned France it risked another deficit breach in 2005, forecasting a shortfall of 3.6 per cent next year compared with 3.7 per cent this year under current policies.