EC to take on France and Germany

The European commission set the stage for an unprecedented and potentially destructive showdown with France and Germany yesterday, promising to hit both with fines unless their ballooning budget deficits are brought under control.

Breaking their silence on the politically charged issue of punitive fines for the first time, two of the commission's biggest hitters said that they would not flinch from throwing the book at the euro zone's two largest economies for making a mockery of the EU's sacred 3% budget deficit cap.

Signalling that Brussels will do everything in its power to defend the EU's tattered stability and growth pact - which forbids deficits above that limit - Mario Monti, the mercurial competition commissioner, and Pascal Lamy, the powerful trade commissioner, both made it clear that there would be no leniency. "When there are rules, they must be applied correctly and equally to all; to big countries and little countries," Mr Monti told Italian daily Il Sole 24 Ore. "If the objective conditions are there...sanctions will be triggered."

Mr Lamy singled out his native France in particular, reacting strongly to comments from its prime minister, Jean-Pierre Raffarin, who appeared to pour scorn on the troubled stability pact. "We shall be reminding France of its obligations and then the question is whether we throw the book at it," he told RTL radio.

"One cannot cheat on the common rules we've agreed upon."

No country has yet been fined for breaching the stability pact but both France and Germany broke the EU deficit cap last year, are expected to do so again this year and, under EU rules, should be fined if they do so again for a third year running in 2004.

Germany is making conciliatory noises, but to Brussels' horror France is pushing ahead with tax cuts of 3% at a time when receipts are badly depressed by a general economic slowdown.

Nor does Mr Raffarin show many signs that France really cares. "We like Europe, but it's also necessary for Europe to like growth and jobs," he told TF1 TV earlier this week.

"My first duty is employment, not to produce accountants' equations or solve mathematical problems so that this or that office in this or that country is satisfied."

He also claimed that the French deficit - which is expected to hit 4% this year - was broadly comparable with countries like the United States and Japan.

Such talk is tantamount to rebellion in Brussels, where officials have struggled to maintain the stability pact. Because the pact is in effect the rulebook underpinning the euro, the issue is particularly sensitive and compliance or non-compliance with it has a knock-on effect on the single currency's value.

There is also growing resentment among the EU's smaller member states - who have struggled to cut their own deficits only to see "the big boys" openly thumb their noses at it.

Earlier this week the commission claimed that France's economy "had gone off the rails" and was dragging down the rest of the euro zone and the battle to bring France to book had started in earnest.

If France and Germany flout the pact for a third year running they stand to be fined up to 0.5% of their gross domestic product - a potentially massive penalty.