EU set to reform budget rules

The global economic slowdown has led countries to push the limits of the pact, which even Commission president Romano Prodi has described as "stupid".

The key proposal involves allowing countries in a sound overall financial position to run deficits to fund long-term spending, but also introduces new disciplinary measures.

So far, Commission warnings have only been applicable to countries who do not keep their public deficit below 3% of GDP.

Germany has been ticked off because its deficit is expected to be above 3% this year, while France was given an "early warning" because of fears it might breach the limit too.

Economic and Monetary Affairs Commissioner Pedro Solbes said the reforms were not serious enough to warrant renegotiating EU treaties.

The Commission hopes the proposals will be agreed by EU leaders at a Brussels summit in March.

Team play

The proposals would give more leeway to countries that have low debt to borrow to finance investment or reforms.

But there would also stricter action, with fines as the ultimate sanction, against countries which do not make enough progress in cutting debt.

Fines have so far only been applied to budget deficits.

While Italy and Greece are the biggest concern, both countries have committed themselves to debt reduction, the Commission said.

Mr Solbes also accused euro zone members of not applying enough peer pressure to keep countries in line.

"We can only move forward if we play by the rules," he warned.

EU finance ministers in February rejected an "early warning" which was asked for by Brussels against Germany and Portugal over their widening deficits.