BRUSSELS, Jan 8: The European Commission on Wednesday urged Germany and France to curb their ballooning deficits, while defending euro-zone rules that force countries to tighten their belts despite the economic gloom.

Amid the global uncertainty fuelled by the threat of war in Iraq, the European Union’s executive arm said the continent must take structural reforms seriously if it is ever to compete with the United States.

“The sudden rise in the oil price linked to the geopolitical situation adds to the uncertainty of the economic outlook,” said Monetary Affairs Commissioner Pedro Solbes, presenting assessments of key EU states’ economic recovery plans.

The Spanish commissioner’s harshest words were directed at Germany, Europe’s biggest economy, which is struggling with a prolonged downturn including record unemployment levels.

In the second step of a formal “excessive deficit procedure” against Berlin, the European Commission proposed Germany to take deficit-battling measures by May 21 to bring its budget shortfall below 3.0pc of GDP.

That is the limit set out in the 12-nation euro zone’s Stability and Growth Pact. EU finance ministers will examine the commission’s recommendation when they meet in Brussels on January 21.

Brussels launched the procedure in November after the publication of forecasts indicating that Germany’s deficit for 2002 would expand to 3.8pc of GDP.

The excessive deficit procedure, which in theory could result in huge fines, was first launched against Portugal last year.

But it is all the more humiliating for Germany, which was the architect of the 1997 stability pact.

Germany only had itself to blame, the commission’s appraisal said.

“The excessive deficit in 2002 did not result from an unusual event outside the control of Germany nor did it result from a severe economic downturn,” it said.

Solbes warned that fellow EU heavyweight France, the subject of an “early warning” by Brussels, remains at risk of breaching the 3.0-percent ceiling in 2003.

“A greater degree of budgetary ambition is required by France,” said the assessment, complaining that Paris plans only to reduce its public deficit to 1.0 percent of GDP by 2006.

The French focus on growth, rather than budgetary discipline, has highlighted criticism that the stability pact is a straitjacket on growth at a time when Europe needs looser economic policies, not tighter.—AFP