Euro-zone ministers are expected to have a lively debate over whether the stability pact should be relaxed to reflect worsening economies, writes Siobhán Creaton, Finance Correspondent, in Copenhagen

The finance ministers from the 12 euro-zone states will informally discuss the worsening position of their exchequer coffers tomorrow with a lively debate expected on whether the stability pact should be loosened to reflect sluggish economic growth.

Each of the euro-zone states has pledged to ensure that their budget deficits - the amount of money they will have to borrow at the end of the year - will not rise to above 3 per cent of gross domestic product and to achieve a balanced budget by 2004. Essentially the maintenance of tight budgets is viewed as being key to the stability of the euro and states that breach this pact will be subject to sanction.

But as fresh statistics paint a gloomier economic picture, particularly in the three biggest economies - Germany, France and Italy - governments are finding it increasingly difficult to deliver on their promise.

Ireland's Minister for Finance, Mr McCreevy, is struggling to balance the books this year but is so far suggesting the Exchequer will post a surplus. This week the Department of Finance revealed that tax revenues are still failing to live up to budget day expectations while Government spending its still well above target.

Early next week the Department will make its normal returns, in line with the Maastricht criteria, to the EU, which will be based on the Exchequer position at the end of June. At that time the Exchequer was in surplus to the tune of €507 million and a surplus of €170 million had been budgeted for 2002 as a whole. However, the mid-year position is not expected to be so buoyant when judged by the Maastricht criteria, which look at the General Government Balance and do not take into account a number of once-off sources of funds tapped by Mr McCreevy.

The August returns indicate some worsening of the mid-year position in light of the collapse in tax receipts. Some economists believe the shortfall could be up to €1 billion, some €500 million more than the Department's revised forecast.

Government spending has begun to slow, but swingeing cutbacks will be necessary in the months ahead to keep within Budget targets. The Minister may be able to find some one-off funds, or delay certain payments to balance the books and avoid moving into the red as far as the Exchequer is concerned. But avoiding a deficit on the General Government Balance will be much more difficult.

Ireland is at least still recording strong rates of economic growth relative to other EU states, albeit well below the heady levels of the last few years.

At previous European and Economic Affairs meetings Mr McCreevy has indicated that he does not favour a revision of the stability pact, particularly given the huge efforts undertaken by the Government to knock its finances into shape to comply with the Maastricht criteria.

Finland's Minister for Finance came out strongly against any attempt to alter the stability pact. Mr Sauli Niinisto said it "was essential to protect the pact" and pointed to likely support from Ireland at today's meeting.

The French have already questioned whether they would reach its targets with Prime Minister Mr Jean-Pierre Raffarin raising concerns over the future of the Stability and Growth Pact on euro- zone budgets this week.

Then, followed statistics from the French government statistics institute, Insee, that recorded economic growth of just 0.5 of a percentage point in the second quarter of 2002, fractionally below expectations.

The economic climate in Germany and Italy is similarly grim and has added fuel to the debate about the pact's viability. German Finance Minister, Mr Hans Eichel, is in an uncomfortable spot as Germany's deficit has almost doubled to €36.6 billion in the first half of 2002 - or 3.5 per cent of its gross domestic product - with suggestions it could rise to 3.7 per cent for the year as a whole.

It is particularly embarrassing for Germany to find itself in this position as it had insisted on the stability pact in the late 1990s to underpin the strength of the euro. Germany has already narrowly avoided an unprecedented EU budget warning after its 2001 deficit rose to just below 3 per cent of GDP, following intense lobbying by Chancellor Mr Gerhard Schröder.

Now, just ahead of the general election in Germany, he has insisted the budget gap will be brought to within the EU limit by the end of the year.

One senior German government official who asked not to be identified told Dow Jones Newswires that "changes" and "improvements" to the budget pact couldn't be ruled out but that the government wouldn't support any.

EU Finance Commissioner Mr Pedro Solbes will be aiming to retain the status quo and has signalled that the EU executive was sticking with its forecast for Germany to show a 2.8 per cent deficit this year.

Italy's accounts plunged sharply into the red in August, making it virtually impossible for its government to honour its EU deficit pledges for 2002.

The Treasury said the budget deficit at the end of August was €3 billion compared with a €2.9 billion surplus in the same month last year.

In July, Portugal became the first to breach the limit, showing a 2001 budget deficit equal to 4.1 per cent of its gross domestic product and would most likely be sympathetic to some easing of the pact's terms.

Each of the ministers is likely to air their view on the subject today with issues around the stability pact likely to remain a key focus in the months ahead.