In the Commission's view, an early warning should be issued to Germany and Portugal

Pedro Solbes

The European Union's executive body voted to uphold rules that EU nations must not overstep a maximum allowable deficit of three percent.

The Commission has never before voted in favour of formal warnings. Its recommendation must now be considered by a meeting of EU finance ministers on 12 February.

Neither Germany nor Portugal has yet breached the 3% deficit limit but both are at risk of doing so this year, prompting the commissioner for monetary affairs, Pedro Solbes, to ask for the warning.

First step

Mr Solbes said the reprimands were an "early warning" which was necessary to uphold the credibility of EU policy on monetary stability.

A decision to endorse the reprimand by EU finance ministers could eventually mean hefty fines if either country does in fact breach the deficit limit.

I will do nothing to cast any doubt on the total agreement between the Commission and the German government

German Finance Minister

The slowdown in Germany, which is Europe's largest economy, has caused particular concern for Europe's overall economic health and the implications for the euro.

German Finance Minister Hans Eichel said after the vote he had "no problem" with the contents of the warning recommendation and reiterated Germany would stick to the budget limit.

The ruling was "not exactly over pleasing" but in reality it "acts as a support to our policy", he said.

"I will do nothing to cast any doubt on the total agreement between the Commission and the German government."

The Commission did not recommend any alteration to Germany's taxation or spending plans and Mr Solbes said Mr Eichel's budget should be implemented as planned, though carefully monitored.

Germany cuts growth target

Mr Eichel also confirmed on Wednesday that Germany had pared its official growth targets for 2002 to 0.75% from 1.25%.

But he said the downgrade did not imply any change to expectations that the economy would pick up during 2002 as it reflected "the unfavourable situation at the end of last year."

German economy

0.75% GDP target, 2002 2.7% deficit target, 2002 2.6% deficit, 2001

"The first half of the year will not be strong...in the second half it will accelerate very strongly", said Mr Eichel.

Germany's budget deficit is officially forecast to reach 2.7% of GDP this year, but many economists think it will overshoot.

Portugal doubled its deficit forecast to 2.2% of GDP for 2001.

Sharing the embarassment

Portugal's finance minister, Guilherme d'Oliveira Martins, has rejected the warning as unnecessary as Portugal's budget was "correct".

"We don't accept the actioning of alert mechanism when we consider, and the commission itself considers, that there is no reason to make changes in the budget policy," he said.

Portugal's deficit

2.2% deficit target, 2001

Speaking at a news conference, Mr Solbes also singled out France and Greece for criticism, saying France's stability programme needed to be ambitious and Greece should do more to cut its debt.

The head of Greece's official panel of economic advisors responded that the government has identified curbing the country's debt as a "top priority".

The Commission said Britain may have its first budget deficit for three years in the 2001-02 fiscal year, albeit a small one.

Red faces

The commission was thought to be divided on whether to issue a warning, with more support for a letter to Portugal than for one to Germany.

The embarrassment at such a public dressing-down will be intense - particularly for Germany, which has for many years been the poster-child of financial stability in Europe.

But the former powerhouse is now mired in recession. As the tide of joblessness rises towards four million people out of work and tax revenues slide, public spending is being supported by increased borrowing.

But the Growth and Stability Pact members of the EU agreed in 1997 sets out a sequence of sanctions for countries which look likely to break the 3% ceiling.