EU budget risks loom in 2005 as oil prices soar

Four euro zone countries risk breaching the European Union's budget deficit limit next year, Dutch Finance Minister Gerrit Zalm said, as record high oil prices cast a shadow over the economic outlook.

But unilateral plans by French Finance Minister Nicolas Sarkozy to ease the threat to growth by giving consumers windfall tax revenues from oil came under fire as EU finance ministers stressed any response had to be coordinated.

"According to the Commission forecasts, Germany, Italy, Portugal and Greece are at risk of getting above three per cent with unchanged policies," Minister Zalm, current chair of the EU's council of finance ministers, told a news conference.

The EU Stability and Growth Pact, which aims to underpin the single currency, limits national budget deficits at three per cent of gross domestic product.

European Economic and Monetary Affairs Commissioner Joaquin Almunia - due to publish Commission forecasts on the bloc's economic outlook and on EU members' budgetary situation this week - said last week he would cut 2005 growth forecasts due to higher oil prices.

The Commission's forecast from April predicted 2005 euro zone growth of 2.3 per cent and 2004 growth of 1.7 per cent, a figure Almunia has said will be revised up to around two per cent.

EU sources told Reuters the Commission will likely predict Italy's budget shortfall will be just below three per cent for both 2004 and 2005, but there was a risk planned income tax cuts could push the deficit above the limit next year.

Almunia said Italy's deficit would be "around three per cent" this year and next.

EU ministers also expressed concern at massive Greek budget deficit revisions for the 2000-2003 period.

"These kind of revisions must never occur again because they are very destructive," Minister Zalm said.

Ministers are due to decide next month on what action may be taken against Greece once Athens has provided more information.

Mr Sarkozy's plan to return some energy tax revenues to French consumers was opposed by all 11 of his fellow finance ministers in the euro zone group at a meeting that dragged on into the early hours of Thursday morning.

EU diplomats slammed Mr Sarkozy's plans as a populist move aimed at winning domestic support for his battle to oust President Jacques Chirac. France infuriated its EU partners in 2000 with tax reductions to help offset high energy costs.

German Finance Minister Hans Eichel said Berlin had no objection to France using the extra revenue for "social measures" but said it would be a problem if it was used for sectoral aid that could threaten competition in the EU.

Oil prices set new records last week when benchmark US light crude futures hit $55.33. They were pushing back toward $55 per barrel on Thursday on fears of a winter supply crunch.

However, German Chancellor Gerhard Schroeder said in Berlin there was no indication oil supplies were tight and that surging prices were principally the result of speculation.

French Industry Minister Patrick Devedjian said oil prices risked hitting French economic activity, with September data showing an unexpected drop of 0.6 per cent in household spending.