The European Commission has given Germany until May 21st to take action to bring its budget deficit below the 3 per cent limit set out in the Stability and Growth Pact.

The Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, said yesterday that he would ask EU finance ministers on January 21st to introduce an excessive deficit procedure against Germany, a move that could lead to big fines if Berlin fails to bring its public finances under control.

Germany's budget deficit reached 3.75 per cent in 2002 and Mr Solbes suggested that Germany's latest stability programme was too optimistic. "With growth prospects not improving, there is a risk that Germany will exceed the 3 per cent of GDP reference value in the 2003 too," he said.

"The German programme projects a balanced budget by 2006, on the back of considerable cuts in expenditure and some revenue-raising measures. This is, however, based on a growth scenario which, in the light of the experience of the last 10 years, would appear optimistic.

"The success of the programme therefore hinges decisively on the successful reform of the labour market and on new reforms of the social security and benefit systems and the reduction of administrative burdens in the economy," Mr Solbes said.

Germany's finance minister, Mr Hans Eichel, insisted that Mr Solbes's remarks did not represent criticism of Berlin's economic policies. But Mr Eichel warned that "possibly painful" spending cuts would be necessary to restore order to Germany's finances.

Mr Solbes stressed that the prospect of fining Germany for its excessive deficit remained distant. But yesterday's warning represents an embarrassment for Berlin at a time when economic news is increasingly gloomy.

The DIW, an economic think-tank close to Mr Gerhard Schröder's Social Democrats, this week lowered its forecast for German growth this year to 0.6 per cent from 0.9 per cent.

Germany was not alone in facing criticism from the Commission in the evaluation of national stability programmes. The Commission said that French economic forecasts for 2003 were too cheerful and that a target of getting its budget close to balance, or in surplus, by 2006 was also based on forecasts that were overly optimistic.

"According to the Commission, the French authorities should strengthen their efforts towards budgetary adjustments, in particular in 2003 and 2004. A greater degree of budgetary ambition is required by France given the projected impact of ageing populations after 2006," the Commission said.

The Commission said Italy's budget stability programme complied only in part with EU guidelines and called for the country to move faster in cutting its public debt. The Commission also said it wanted additional information on the budgetary and fiscal strategy beyond 2003.

"A more prudent assessment of public finance trends and economic developments, as in the Commission's autumn 2002 economic forecasts, suggests that, in the absence of measures additional to those already proposed, the 2004 deficit could exceed 3 percent of GDP," it said.