France and Germany under cosh over deficit

FRANCE and Germany are expected to come under the most concerted pressure yet from other EU finance ministers over their plans to exceed the Stability Pact for a third year and face multi million euro fines.

The meeting of finance ministers in Italy today and tomorrow comes as the European Commission lowered its growth predictions for the third time this year to a meagre 0.5%.

Data on Tuesday showed the eurozone was close to recession.

The European Central Bank (ECB) has criticised breaches of the 3% deficit and the in coming president and current governor of the Bank of France Jean Claude Trichet issued a sharp reminder yesterday of the dangers such action posed for the eurozone.

While the Italian presidency is expected to take a lighter view of the deficit overshoots, figures from Italy released yesterday show they will not breach the 3% as expected and hinted at earlier this year by prime minister Silvio Berlusconi.

The economy is expected to grow by just 0.3%, its worst performance in over a decade, while its budget deficit will be 2.8% of GDP this year, higher than its June forecast of 2.4%.

Germany's chancellor Gerhard Schroeder and France's prime minister Jean Pierre Raffarin are unrepentant about tax cuts and increased spending, saying economic growth is more important than the pact.

However, a number of governments, including Finland, Spain and Holland, believe a tough stance should be taken against the eurozone's two largest economies and are expected to support the commission's excessive deficit procedure notification of September 1 last.

Finance Minister Charlie McCreevy the first to receive criticism, for his handling of the Irish economy has said in the past that countries, regardless of size, must abide by the pact.

The ECB has issued a series of warnings over the breach of the Stability Pact. This week, outgoing president Wim Duisenberg said the pair's deficits would have "adverse consequences for economic growth and employment" in the euro zone.

Mr Trichet told a European Parliament committee yesterday that, in the long run, increasing deficits would undermine the euro zone's ability to grow and create employment.

A spokesperson for the Economic Affairs Commission Pedro Solbes said yesterday that the increasingly poor outlook suggests the deficit for the eurozone as a whole risks being above 3.9% this year.

The meeting of finance ministers will also discuss trends in the economic situation generally and will be the first time the ministers of the current 15 and incoming 10 member states meet together.