Portugal's public deficit is set to come in within EU standards this year, reducing fears of EU sanctions.

Portugal's statistics office INE predicts the year to end with a 2.84% deficit, just within the 3% maximum limit set for members of the eurozone.

The deficit will thus have shrunk dramatically from 4.1% of the country's output in 2001.

The news came just over a month after the European Commission said it would initiate a sanctions procedure against Portugal due to 2001's excessive deficit.

Warning issued

The fear is that large deficits could threaten the stability of the eurozone.

In 1997 member countries agreed to a stability and growth pact in order to make sure the zone's economies keep in step with each other.

Under the pact, deficits should not rise above 3% of gross domestic product (GDP).

The Commission's sanctions procedure was preceded by a formal warning when Portugal appeared close to breaching the eurozone's pact.

The warning was subsequently followed by a compromise which allowed Portugal more time to get back into line after it promised to reduce its deficit and come close to a balanced budget by 2004.

First time

The Commission is generally loath to use its sanctioning powers unless it has to.

In July, moves were made in Brussels to relax budget rules to give member countries more freedom to fuel economic growth with public investment.

A proposal, due this autumn, is set to outline common standards for economic policy which should

• preserve macroeconomic stability
• raise the economic growth potential
• cope with economic shocks

The move was widely seen as a response to criticism from several European Union member states which have been angered by what they see as the Commission's meddling with their national spending plans.

"The concept of the excessive deficit procedure does not exist to penalise people, but to prevent problems," said Commission spokesman, Gerassimos Thomas.