Gordon Brown warned yesterday that rules governing economies in the eurozone must be reformed and said they will form a key part of the assessment of the tests for entry to the single currency.
Portugal, France and Germany face sanctions for breaching the European Union's Stability and Growth Pact, and Mr Brown said a paper on the pact would be published alongside results of the five economic tests next summer.
The Treasury wants reform of the rules on borrowing and public spending, which were labelled "stupid" last month by the European Commission president, Romano Prodi. The pact lays down binding rules for the 12 nations inside the eurozone, including the stipulation that budget deficits must not exceed 3 per cent of gross domestic product (GDP).
It has been under increasing strain with Germany and France at risk of hitting the 3 per cent ceiling, Italy in difficulty and Portugal already in breach of the rules. The problems showed the importance of a more prudent application of the rules, he said. "The Government has consistently supported a prudent interpretation of the pact that takes into account the economic cycle, sustainability and the important role of public investment."
He added: "We have always taken the view since 1997 that the stability pact contained three elements that were in need of reform. The first is that it should take more account of the economic cycle. The second is that countries with a high level of debt should be treated differently from countries with a low level.
"Countries, and there are three of them, with levels of debt above 100 per cent of GDP should be treated differently from countries like ours with debt at less than 40 per cent of GDP."
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