The European Commission will next week put forward proposals to improve the application of the Stability and Growth Pact and for a more co-ordinated management of euro-zone budgetary policies.

The Commission President, Mr Romano Prodi, told the European Parliament in Strasbourg yesterday that the proposals were part of a broader strategy to improve economic policy co-ordination.

"The basic aim is to put public finances on a sounder and more sustainable footing."

"This involves ensuring that the rules are implemented both intelligently and with authority so as to foster growth and employment," he said.

Mr Prodi created a storm of controversy last month when he described the Stability and Growth Pact as "stupid".

He insisted later that he supported the pact but added that it was important that the EU budget rules should be applied flexibly and intelligently.

He promised yesterday to improve the Commission's work of economic assessment and monitoring next year.

"This will usher in a more flexible approach that can draw all our procedures together within a single co-ordination cycle."

"This will bring better synchronisation of the spring report on progress under the Lisbon strategy with the Broad Economic Policy Guidelines and the Employment Guidelines," he said.

Some commentators fear that the pact, which obliges euro zone governments to keep budget deficits below 3 per cent of gross domestic product, is too strict for current economic conditions.

But in an interview with the German weekly Die Zeit today, the Economic Affairs Commissioner, Mr Pedro Solbes, said it was essential that the pact should be respected.

He suggested, however, that a more lax approach could be taken to small euro-zone members such as Ireland.

"If a country like Ireland breaks the stability pact, then that does not matter that much.

"But if a country like Germany breaks it, that can have dire consequences, also for the euro," he said.

Some European Commission officials expressed surprise at Mr Solbes's remarks, particularly in view of the tough stance he took against Ireland last year over the Government's breach of the Broad Economic Policy Guidelines.

"It's strange to see him taking a flexible approach now. There wasn't much sign of that last year," said an official.