Flouting EU rules on budget deficits will damage growth prospects in the eurozone, the outgoing head of the European Central Bank (ECB) has said.
Duisenberg: 'Essential' that budgets are brought in line
Speaking at what is expected to be his last appearance in front of the European Parliament, Wim Duisenberg said some countries had failed to show "sufficient determination" in meeting budget rules.
Both France and Germany are in danger of breaching the budget deficit limit of 3% of gross domestic product for three years in a row, a move which could lead to fines from the European Commission.
However, reports on Wednesday suggested that the Commission could have found a loophole in the rules which would allow countries to escape fines.
Playing by the rules
Mr Duisenberg was speaking before the European Parliament's committee on economic and monetary affairs, in what is expected to be his last appearance before he is succeeded by his designated replacement, Bank of France governor Jean-Claude Trichet.
Without naming either France or Germany, Mr Duisenberg warned that breaking the rules of the eurozone's stability and growth pact could lead to trouble.
"A lack of fiscal discipline... is a factor weighing adversely on the euro-area's long-term growth prospects," he said.
"In order to strengthen confidence in the euro area, it is fundamental... to abide in all respects by the agreed rules of the game.
"It is essential in that in the budgetary plans currently being prepared for 2004, there be a correction of excessive deficits within the agreed time frame in the countries concerned."
Concern has been growing at the actions of France, which is planning tax cuts next year despite already breaking the stability pact's budget rules.
However, reports on Wednesday suggested the Commission may have come up with a way of allowing countries to break budgetary limits without being fined.
French PM Jean-Pierre Raffarin has pledged tax cuts
The Commission is considering using a reference in the pact to "special circumstances" which might excuse countries who fail to meet the targets, unnamed EU sources told the Reuters news agency.
What these "special circumstances" might be defined as is still unclear, but they are separate from "exceptional circumstances" defined in the pact as a severe recession or natural disaster.
"France does not satisfy the conditions for the exceptional circumstances but the discussion now is about special circumstances, which is a completely different matter," the source told Reuters.
"Using special circumstances for France would be a way of getting some additional space for whatever discussion that would follow but there is no way that this would be the end of the story."
Mr Duisenberg rejected calls for a further cut in eurozone rates, saying they were "appropriate at present".
His comments came as the European Commission cut its forecast for eurozone growth to about 0.5% from 1%.
But Mr Duisenberg said that signs of an "upturn in economic activity starting in the second half of the year have strengthened".
And he urged eurozone members to speed up reform measures to make their countries more competitive.
"The only way to increase the growth potential of the euro area is to implement and execute structural reforms in markets, in labour, product and financial markets, and we have been slow
in doing that," he said.