France and Germany to Flout Budget Rules Until 2006

The economic fundamentals that underpin the eurozone looked shaky last night after the European commission warned that its two biggest economies - Germany and France - are on course to flout EU budget deficit limits for four years running.

Despite the threat of punitive fines, Pedro Solbes, the EU monetary affairs commissioner, disclosed that both countries were likely to run budget deficits above the EU's maximum 3% of GDP ceiling until 2006.

They could only avert such a situation, he added, if they took urgent remedial action.

The news came as the German government yesterday approved the biggest budget deficit since the second world war.

The cabinet agreed to a plan by the finance minister, Hans Eichel, that would see the country's debts rise to €43.4bn (£30bn) this year - twice the amount originally forecast and well above the 3% ceiling.

Mr Solbes noted that three countries have broken the rules of the EU's stability and growth pact in the past (Germany, France and Portugal) and warned that the Netherlands, Italy and Greece were looking like they would follow suit.

He said the UK, which is outside the eurozone, was also at risk. The commission estimated that the UK deficit would swell to 2.8% this year from 1.5% in 2002. Although the commission could not fine the UK if it broke the 3% limit it might rebuke it for sloppy handling of public finances.