Crisis looms for euro as Italy tries to change rules

Storm clouds are gathering around the pledge of euroland countries to control their budget deficits, threatening the first full-blown euro crisis when European Union governments return to work next month.

An Italian cabinet minister called yesterday for a weakening of the Stability Pact, which commits members of the eurozone to reduce their deficits and cut public debt. He said the EU should be stimulating growth, not pushing for tax increases or budget cuts to bring budgets – including the Italian budget – under control.

France is also struggling to rein in its budget deficit this year and President Jacques Chirac is committed to an ambitious programme of tax cuts and spending increases, which threatens to make next year's figures even worse.

Portugal was recently given an official warning and a threat of fines when it became the first of the 12 euroland countries to breach the deficit ceiling of 3 per cent of GNP.

Germany's budget figures are also close to the point where Berlin – traditionally the most financially rigorous of European countries – could be landed with the humiliation of EU penalties.

In the face of a drumbeat of complaints, and calls for a change in the rules, in all these countries – and especially Italy – the European Central Bank and the European Commission insisted this week that the ceilings must not be changed. With the single currency finally beginning to float higher on international exchange markets, Frankfurt and Brussels say it is imperative that euro members hold the line against budgetary laxity.

The Stability Pact, certifying that the new currency would not be undermined by the profligacy of one or two of its members, was sold to the markets as one of the principal guarantees of the strength and solidity of the euro. A change in the rules at the first sign of economic difficulty would undermine the European currency's credibility.

Paradoxically, such a move might ease the way for Britain to join, removing one of the objections of opponents: that the euro would place a straitjacket on Britain's tax and spending choices.

Giuliano Urbani, the Italian Culture Minister, told La Stampa newspaper yesterday: "We will have to revise the Stability Pact because ours is not the only country to be in difficulty. France and above all Germany risk not being able to fulfil their obligations and approach the goal of a balanced budget."

Although Mr Urbani has no responsibility for economic affairs, he is one of the most senior members of the Forza Italia party of Silvio Berlusconi, the Prime Minister.

The Stability Pact, officially the Stability and Growth Pact, commits governments that belong to the eurozone to keep their budget deficits within 3 per cent of GDP and to balance public income and spending by the end of 2004.

Italy had pledged to reduce its deficit to 0.8 per cent of GDP this year, but is now forecasting a level of 1.1 per cent. With the economy slowing and tax revenues dwindling, economists warn that it will, in truth, be double that.