BRUSSELS, Nov 27: The European Commission on Wednesday proposed major changes to the euro zone’s beleaguered stability pact, in a bid to force countries to toe the line while also boosting prospects for economic growth.

The 1997 Stability and Growth Pact has been plagued by criticism in recent months as the scale of the economic slowdown in the European Union becomes clear, with even commission president Romano Prodi labelling it “stupid”.

In a drive to make the pact more flexible, the EU’s executive arm proposed allowing countries with healthy overall finances to run deficits to fund long-term investment.

But it also called for the first time for disciplinary measures against euro-zone members whose national debt surpasses the pact’s ceiling — 60 per cent of gross domestic product.

The commission urged EU leaders to reaffirm their commitment to the stability pact, after recent backsliding, and to agree to reduce structural deficits by at least 0.5 per cent of GDP a year.

The deficit limit set out in the pact is 3.0 per cent of GDP, which Germany and Portugal have breached while France is in danger of doing so.

The commission’s document stressed that EU leaders must take account of the interests of the euro zone as a whole when drawing up national budgets.

Economic and Monetary Affairs Commissioner Pedro Solbes accused EU economies of “often not playing their role in exerting peer pressure on countries that miss budgetary targets”.

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

EU finance ministers in February rejected an “early warning” proposed by Brussels against Germany and Portugal over their widening deficits.

In the event, both countries are now subject to an “excessive deficit procedure”, with France joining them in the doghouse.

The proposed changes, which must be approved by EU leaders, “will make implementation of the pact more intelligent”, Prodi told reporters.

“Flexibility doesn’t mean laxity. It means taking account of the various phases of the cycle and having a realistic view of a member state’s economy,” he added.

A key criticism levelled at France and Germany by smaller euro-zone states is that they failed to get their budgets in order during the late 1990s economic boom and are now paying the price.

“Member states will no longer be able to live under the illusion that they can spend growth dividends when their structural positions are in fact weak,” Prodi said.

“They can no longer keep postponing their budget targets when it’s clear that miracles are not happening.”

In a major departure, the proposals would allow member states with sound public finances the leeway to invest more to boost employment and growth.

But they would be allowed a “small, temporary deterioration” in their finances only if they have made “substantial progress” towards a balanced budget.

So far, commission warnings have only been applicable if countries refuse to cut their public deficit below 3.0 per cent of GDP. They would be extended to those which fail to reduce their debt at a “satisfactory pace”.

The commission said that Greece and Italy “give most cause for concern” regarding overall debt levels, which in their cases are over 100 per cent of GDP and rising.

The commission hopes to see its proposals agreed by EU leaders at a Brussels summit in March.—AFP