Five nations criticised for overspending as EU currency pact hits new crisis

Five of of the eurozone countries have either breached or risk breaching the laws laid down for single currency membership, the European Commission warned yesterday.

France and Germany have already provoked a political crisis by breaking the so-called Stability and Growth Pact, which governs euro members, but Italy and the Netherlands may also fall short of their obligations, the European Commission said.

The UK, which is not a member of the single currency but is bound by most of its rules, was also singled out for criticism. Because of sluggish growth the five countries have either broken, or could break, the requirement to keep budget deficits below 3 per cent of gross domestic product. France risks a fourth year in breach of the rules in 2005 and could remain above the ceiling until 2007.

The European Commission reports underline the weakness of recovery in Europe, which has yielded low tax revenues for treasuries and put increasing demands for government spending on welfare payments. But they also showthat the pact has become unenforceable.

The prediction that the Netherlands may hit the 3 per cent ceiling illustrates the depth of the pact's credibility crisis because the Dutch government is one of its few staunch defenders. It was furious about the refusal by EU finance ministers to punish France and Germany for their repeated breaches of the rules.

The assessments coincided with news that the Commission had lodged its legal case in the European Court of Justice in Luxembourg against EU finance ministers for letting France and Germany off the hook after breaking the 3 per cent ceiling.

While the Commission plans to produce proposals for minor reforms, Pedro Solbes, the Commissioner for economic and monetary affairs, said he remained wedded to the 3 per cent budget deficit ceiling designed to underwrite the currency's strength. "The idea of the fiscal framework is correct, the idea of the 3 per cent is correct," he said. "No modification of treaty is required."

The euro has surged against the US dollar on the foreign exchange markets despite the controversy over the pact. But many diplomats are worried about the lack of any concerted effort to reform the rulebook.

The assessment of France's budget programme said that planned budget measures might not be enough to eliminate the excessive deficit in 2005, as Paris has promised.

The Commission told Italy and the Netherlands that their deficits this year would come close to the ceiling. While Germany will not get the Commission's formal views on its budget plans until February Mr Solbes said: "A diminishing reduction of the [German] structural deficit in 2004 means higher risks for breaching the 3 per cent in 2005."

Britain has admitted to a 3.3 per cent deficit cap in the 2003-04 financial year which Mr Solbes said, "could constitute an excessive deficit". But he argued that it had yet to be confirmed whether the 3 per cent ceiling had been breached in the 2003 calendar year.

He also softened his criticism by noting that Britain's low debt levels and relatively low levels of taxation meant there was "room for manoeuvre".