Will the prime minister's reforms satisfy the EU?

The ruling makes Portugal the second EU country to face a formal complaint over budget shortfalls since the rules were relaxed earlier this year.

Several countries, notably France and Germany, have repeatedly breached the deficit limit - 3% of GDP - set out in the EU's Stability and Growth Pact.

But to date none has faced the ultimate sanction of huge fines.

Italy was similarly criticised earlier in June.

Flouting the limit

The pact was agreed in 1997 with the aim of keeping EU states' budgets in check so as to help avoid the risk of inflation.

But with economic expansion proving challenging for many of Europe's 25 member states, critics charge that the limits are acting like a strait-jacket.

France and Germany, the biggest economies among the 12 which use the euro, have both repeatedly flouted the limit without incurring any sanction.

That, smaller countries have said, amounts to favouritism - and the pact was loosened earlier this year to allow for breaches in special cases such as economic stagnation.

Home-grown plans

Portugal's economy has certainly been in trouble, running into recession in 2003 and recording only 1% growth the following year.

It first breached the pact in 2001, and was censured then as well.

But the European Commission says this means the shortfall is neither temporary nor exceptional - and thus fails to meet even the new, looser criteria for leniency.

In 2004 it was 2.9% but is expected to top 6% this year, while total public sector debt - at 66% of GDP - is also above the pact limit of 60%.

The EC will receive an opinion from finance ministry officials drawn from across the EU within two weeks, which will guide it to a deadline for Portugal to get its deficit back down.

The government of Prime Minister Jose Socrates has already proposed a plan to cut this year's deficit from a projected 6.8% to 6.2%, using a hike in VAT and a cut in public spending.

The plan will have the deficit down to 2.8% of GDP by 2008, it says.

But the VAT hike and the spending cuts could themselves hit Portugal's economic growth.

Employers fear the VAT increase will discourage consumer spending, and trade unions are planning to strike over civil service reforms.