UN economists have urged the European Union to be flexible with budget deficits, warning excessive tightness could tip the bloc into recession.
The report, "World Economic Situation and Prospects 2003", comes a day after the European Commission said Germany's 2002 deficit topped the 3.0 percent limit enshrined in the bloc's Stability and Growth Pact.
"A key risk facing the euro zone concerns fiscal policy and the requirements of the Stability and Growth Pact. A major fiscal retrenchment in the large economies could tip the balance to recession," said the report issued jointly by the U.N. and UN Conference on Trade and Development (UNCTAD).
UN economists forecast growth doubling to 2.1 per cent in 2003 in the 15-member EU, compared with last year, assuming that there would be "no major fiscal consolidation over the short term."
But the report also stressed that the Stability Pact, under which euro zone countries committed themselves to balancing their budgets by 2004, could not simply be abandoned, rather than loosened, without a "major loss in confidence."
The best solution would be a mix of tighter fiscal policy and looser monetary policy, it said.
"The report comes very close to suggesting that the deadline for achieving the Maastricht objective should be delayed," Carlos Fortin, UNCTAD deputy secretary-general, told a briefing.
"It was a policy recipe put forward at a time in which the main problem was to contain inflation. When the situation is the opposite - the main problem is to revive growth - it is simply out of place."
Heiner Flassbeck, head of UNCTAD's macroeconomic policy branch, said that more flexibility was needed in the stability pact which is aims to underpin the single currency, the euro, by showing members' commitment to fiscal discipline.
"Brussels seems to understand maybe better than before that...a postponing of the strict reduction in government deficits is necessary," he said.
Flassbeck backed a quick reduction in euro interest rates to spark growth. "There should be a further cut and not too late."
"To revive and stimulate the European economy, the interest rate should clearly go down and should go into the range that is at this moment given in the United States," he added.
The European Central Bank's key interest rate stands at 2.75 percent against 1.25 percent for the U.S. Federal Reserve.
Germany was in a "very difficult position", but the depth of the crisis was being exaggerated, according to the economist.
"We think it is not the sick man of Europe. It has a big deficit and big burden due to its unification. This is the main message: it can only grow out of that deficit," he said.