The European Commission will this week discuss disciplinary procedures against Italy and the Netherlands for breaching EU budget rules, amid renewed calls for a reform of the Stability and Growth Pact. Denis Staunton reports from Punchestown

The Commission president, Mr Romano Prodi, told reporters during a meeting of EU finance ministers in Punchestown on Saturday that the Commission was likely to give Italy an "early warning" about its budget deficit.

The Dutch finance minister, Mr Gerrit Zalm, said his government would welcome a Commission warning against breaching the 3 per cent budget deficit limit.

Germany and France are already in breach of the Stability and Growth Pact and Germany's Mr Hans Eichel predicted in Punchestown that half of the euro-zone's 12 member-states could break the rules in 2005.

Italy's prime minister, Mr Silvio Berlusconi, and finance minister, Mr Giulio Tremonti, called for a change in the pact to promote economic growth as well as stability.

Mr Tremonti suggested, however, that such a reform would have to wait until after the present Commission leaves office in October.

"The impression is that this Commission has now lost its momentum. We cannot expect any more proposals from this Commission. It is obvious that this is no longer the Commission we have seen in the past," he said.

Mr Eichel said that no reform was likely until 2005, adding that no change in the actual rules was required but that they should be applied differently.

The president of the European Central Bank (ECB) Mr Jean-Claude Trichet, said that the pact was an essential element of the EU's economic and monetary union. "We have to apply the text as it is. Implementation could be improved," he said.

Mr Trichet defended the ECB's decision to leave interest rates unchanged last week but insisted that its monetary policy was flexible and would respond to new information.

"The balance of risks is balanced today, yesterday and the day before and we are not biased. We didn't say rates were there for a considerable period of time," he said.

Mr Trichet said that ministers had asked him five questions about the ECB's policy and that he had made clear that the ECB was alert to new data and ready to respond to it.

Saturday's meeting began with a discussion of the EU's financial perspectives - or budget plan - for 2007-2013. Mr Prodi defended the Commission's call for an increased budget aimed at improving competitiveness and targeted towards the new member-states that will join the EU in May.

The six net contributors to the EU budget - Germany, France, Britain, Sweden, the Netherlands and Austria - repeated their demand that the budget should be capped at 1 per cent of the EU's gross national income. Mr Eichel said that, given the pressure on countries such as Germany to cut deficits, it was unreasonable to ask that they should pay more into the EU budget.

Mr McCreevy said that discussion on the financial perspectives would continue "for another year, perhaps longer" and that Saturday's discussion revealed divided views.

"Some member-states believe the growth of the Union's budget should not exceed the growth of the Union's economy. Others could support a more rapid increase. The Commission remains firmly of the view that the increase in spending which it envisages is essential if the Union is to meet its existing commitments, including enlargement, and maintain the impetus of the overall political project," he said.

Mr Eichel predicted that the negotiations would continue into 2006 and would culminate in "a long, hard night of negotiations".