'Big three' nations accused of bullying over currency pact

A damaging rift opened in the European Union yesterday as smaller states angrily denounced a decision to relax Europe's single currency rules to suit more powerful nations unable to balance their budgets.

Finance ministers and central bankers in Belgium, the Netherlands, Austria and Finland protested over Tuesday's announcement by the European Commission which gives France, Italy, Germany and Portugal until 2006 to balance their budgets, a two-year extension.

The decision is seen as an acceptance of the inevitable: that the eurozone's big economies are stuck in the doldrums and have no realistic prospect of getting their public finances into shape by 2004.

The concession opens the way for France and Italy further to weaken the rules laid down in the Stability and Growth Pact, designed to sustain confidence in the euro.

Paris wants it to allow governments to stimulate their economies in times of sluggish growth – something that would be welcomed by the Treasury in Britain, which sees the rigidities of the pact as an impediment to entering the eurozone. But the Commission's announcement prompted protests from nations which have taken unpopular decisions to meet their commitments. They argue that the delay of Europe's balanced-budget deadline to 2006 may lead to higher inflation, prevent lower interest rates and test the credibility of the euro.

Didier Reynders, Belgium's Finance Minister, argued: "If next year or in 2004 the German, Italian or French budgets should again veer away from an equilibrium, I think we would not only put at risk the pact but the legitimate confidence of investors and consumers in the evolution of the European Union."

The Austrian Finance Minister, Karl-Heinz Grasser, said: "If one now postpones this [deadline] to 2006, that would be a wrong signal. A 'two-class' system with large euro states that don't have budget discipline and small states that maintain their discipline would not be acceptable."

Opponents of the change will be outgunned because the three countries that stand to benefit from the concession – France, Italy and Germany – make up almost three quarters of the eurozone economy.

Under the stability pact all governments are obliged to bring budgets close to balance in the "medium term". An initial target date of 2002 had already been postponed by two years before the surprise decision to move it to 2006.

In exchange for the concession Brussels says it will expect countries that are still some way from balance to reduce their structural deficit by a minimum of 0.5 percentage points a year.

Commission officials insist the centrepiece of the stability pact – under which countries with budget deficits higher than 3 per cent of gross domestic product face massive fines – remains intact. But it is under strain. Portugal broke the ceiling last year with a 4.1 per cent deficit and France and Germany are in danger of going above 3 per cent this year.