COPENHAGEN, Sept 7: Euro zone finance ministers insisted on Friday they would not water down budget rules, but did not address the deficit headaches some would face as they cut growth forecasts and warned of risks from any war with Iraq.

The euro zone’s Stability and Growth Pact on fiscal discipline would not be bent, the ministers said, dismissing talk of revising the rules as their economies struggle to generate the tax receipts needed to rein in deficits.

The Euro Group meeting concluded the Stability and Growth Pact must be respected, Greek Finance Minister Nikolaos Christodoulakis, who chaired the meeting, told a news conference.

His words echoed remarks made earlier in the day by finance ministers from around the bloc, who rallied to the defence of the pact despite calls from some European politicians for it to be loosened as countries struggle to keep to its terms.

Under the pact, which underpins the euro common currency, EU governments have to contain their budget deficits within three percent of output and work towards a balanced budget in the medium term.

Whatever the circumstances, the three per cent ceiling must not be exceeded, Christodoulakis said.

But he conceded growth in the 12-member euro zone this year would fall well short of the previous forecast by the European Commission.

All the evidence points to the fact it is likely to be marginally below one per cent, Christodoulakis said.

In the spring, the Commission forecast 2002 growth for the euro zone of 1.4 per cent.

In France, Prime Minister Jean-Pierre Raffarin said his country’s economy would not grow at the three percent rate the government had been banking on for 2003 to wipe out its deficit by 2004 a target it set itself in the pact’s name.

France is not the only one struggling to rein in its deficit so are Germany, Italy and Portugal. Moreover, Germany’s budget situation has been aggravated by the cost of recent disastrous flooding.

European Union economic and monetary affairs commissioner Pedro Solbes, who is responsible for policing the Stability Pact, said the costs Germany faced in making good damage caused by the floods could be considered exceptional.

Suggesting Germany could be given some flexibility over the treatment of its budget deficit given the costs it faced because of the floods, he said: The flood costs can be considered an exceptional event.

The pact’s three per cent deficit to GDP ceiling can be broken in special circumstances, giving Berlin an escape clause.

But despite the prospect of slower growth — and hence lower than-previously-expected tax receipts — finance ministers warned against loosening the Stability Pact.

It would be a terrible signal if we were not to stick to the (Stability and Growth) Pact, but try to discuss it and make new interpretations, Austrian Finance Minister Karl-Heinz Grasser told reporters on the sidelines of the meeting, which will include EU central bankers on Saturday.

With the outlook for this year gloomier than previously forecast, a pick up in growth was not likely to kick in until next year.

Acceleration of growth is most likely in the first half of next year, Christodoulakis said.

But growth could be further dented in the event of a war in Iraq, warned Danish Finance Minister Thor Pedersen, who chaired a broader meeting of finance ministers from the whole of the European Union.

Every kind of war costs money and it also costs sometimes a lower level of living standards for those involved, but it can be necessary to have this kind of cost, he told Reuters.

He made his remarks as the United States and Britain began a feverish round of consultations to overcome opposition to a possible war on Iraq.

While acknowledging that growth was weaker than previously expected, ministers sought to present a positive outlook.

The situation is more difficult than expected, but it is possible to overcome it with calmness and responsibility, Italian Treasury Minister Giulio Tremonti said.—Reuters