EU throws in the towel on budget balancing deadline

The European Commission abandoned its deadline for gov-ernments to balance their budgets, giving scope for tax cuts and increased spending to help Europe's economy recover from the slowest growth in nine years.

With Germany, France and Portugal risking deficits that surpass the limit of 3 percent of GDP this year, the commission pushed back the deadline for erasing the shortfall by two more years to 2006.

It also pledged to take the slowdown into account when assessing national budgets.

"It will help to counter the recessionary slide," said Angus Sibley, who helps manage 11.1 billion euros (US$10.9 billion) at Carr Sheppards Crosthwaite Ltd in London.

"Cutting spending is undesirable in an economy because in a recession, the private sector is not willing to spend."

The plans loosen the German-inspired "stability pact" designed to protect the euro and may prompt a clash with the European Central Bank.

Europe's public-finance rules are coming under strain as economic growth slips below 1 percent this year, the weakest pace on the continent since the 1993 recession.

Deficits are widening as sluggish growth crimps tax revenue and lengthening jobless lines boost welfare costs.

The ECB opposes any relaxation of the rules, saying that excessive government spending could push up inflation.

Easing the constraints would be "damaging for the credibility of the currency union," ECB council member Klaus Liebscher of Austria told the Austrian Press Agency.

The commission released its new interpretation of the pact two days after the re-election of German Chancellor Gerhard Schroeder, who delayed tax cuts in order to keep this year's deficit inside EU limits.

The plan comes a day before French Prime Minister Jean-Pierre Raffarin announces a tax-cutting 2003 budget.

Italy also intends to reduce taxes next year.

"It seems to me the commission is working on positive solutions," Italian European Affairs Minister Rocco Buttiglione told reporters in Rome.

Italy has called for public works spending to be taken out of the official budget calculations.

Germany invented the stability pact to prevent widening budget gaps from undermining the euro.

Pushing back the deadline -- already delayed once, from this year to 2004 -- may mean the central bank balks at reducing interest rates, some analysts said.

The ECB kept its benchmark rate at 3.25 percent for the 10th month last week.

"The worst thing at the moment would be to force the French, German and Italian gov-ernments to tighten their belts at a time when their economies were already slowing," said Alasdair Murray, an analyst for the London-based Center for European Reform.