Germany and France incurred public censure over their budget deficits today after the European Commission said Berlin would break EU deficit limits this year and Paris risked following suit next year.
A sluggish recovery forced the European Union executive to slash growth forecasts, but it insisted interest rates were no obstacle to recovery and signalled it would enforce budget discipline despite downside risks to growth.
EU monetary affairs commissioner Mr Pedro Solbes launched discipline action against Germany on the basis of forecasts that Europe's largest economy would run a 2002 deficit of 3.8 per cent of gross domestic product, above the EU's three per cent cap.
France, the euro zone's second largest economy, risks breaking the limit in 2003 and should be sent an official warning, Mr Solbes said. Its deficit is forecast at 2.7 per cent of GDP in 2002 and per cent in 2003.
Ironically, Germany framed the strict budget rules to ensure countries did not undermine the stability of the euro after the currency was launched in 1999 by profligate spending but finds itself the second euro member to break these rules.
Fines are the ultimate sanction if a country fails to take remedial steps to bring its deficit back into line, but the process is long and drawn out, and few expect Berlin to be fined.
Portugal, the first country to trigger the excessive deficit procedure after it reported a shortfall of 4.1 per cent in 2001, is expected to run a deficit of 3.4 per cent in 2002 and 2.9 per cent in 2003, the Commission said.
The Commission also expressed concern about Italy's 2002 deficit, forecast at 2.4 per cent of GDP and its debt, expected to be equivalent 110.3 per cent of GDP in 2002.