Europe hammers deficit bingers

Brussels - Europe took a hard line with EU members over soaring government debt levels on Wednesday, while Germany upped the pressure by saying rule-breakers should be kicked out of the eurozone.

The European Commission attacked overly "optimistic" growth assumptions masking bloated national budgets, with Britain firmly in the firing line over "uncertainty" in its spending plans.

Forecasts and commitments given by "a majority" of 14 nations with deficits causing concern in Brussels were seen as likely to fall short of targets - a charge which has caused shock waves in London ahead of a general election.

Germany, accused of having a budget strategy which was "not sufficient to bring the debt ratio back on a downward path," had earlier raised tensions among the 16 nations in the eurozone.

Eurozone political daggers are already drawn over the need to craft immediate contingency bailout rules because of financial chaos in Athens and fears over the financial stability of other southern countries including Portugal.

German Chancellor Angela Merkel warned that in future, Europe needed "a treaty framework in which it would even be possible as a last resort to exclude a country from the euro if it again and again breaks the conditions over the long-term."

A firm line taken by the EU towards the immediate Greek problem appeared to be working, as measured by the interest rate Greece has to pay to borrow money. The EU has told Greece to apply tough corrective measures, arguing that these alone should win Greece back credibility on financial markets.

As the EU said late on Tuesday that it had worked out contingency arrangements to help Greece, but did not intend to use them, a key credit rating agency gave Greece a breathing space, and the interest Athens has to pay to borrow fell to close to 6.0%, or about a whole point lower than two weeks ago.

Meanwhile, public debt in Britain - a member of the EU but not of the eurozone - is a hot election issue.

On Tuesday, Finance Minister Alistair Darling described recommendations under the assessment, which had been leaked to British media, as "absolute madness."

Britain's deficit level, as a proportion of GDP, is currently as high as that of Greece, with Prime Minister Gordon Brown's government having largely pushed back spending curbs in the run-up to an election expected at the beginning of May.

EU finance ministers will study the commission's recommendations when they meet next month in Madrid.

Speaking in the European parliament just after they were revealed, the managing director of the International Monetary Fund, France's Dominique Strauss-Kahn, said that countries should act now.

"Our own advice is that the solution for the rather big public debt that most countries in Europe have to face now, is to try to solve it swiftly," he said.

With a deadline of 2014-15 to correct overspending currently at 12.7% of British output, "the absence of detailed departmental spending limits is a source of uncertainty," the European Commission, the EU's executive arm, said.

"The macroeconomic context may also be distinctly less favourable than envisaged throughout the programme period," Brussels underlined in a detailed assessment of commitments made by the biggest countries in the bloc to bring down post-recession excessive deficits.

"Overall, for the majority of the 14 programmes, the growth assumptions underlying the budgetary projections are assessed as rather optimistic, implying that budgetary outcomes might be worse than targeted," the office of Economic and Monetary Affairs Commissioner Olli Rehn said.

Brussels warned that only Bulgaria and Estonia were planning to meet the EU's three-percent-of-GDP target within the allocated national timeframes, it added.

Aside from that duo and Britain, the others assessed were: Austria, Belgium, Finland, France, Germany, Italy, Ireland, the Netherlands, Slovakia, Spain and Sweden.

A row broke out with London on Tuesday, when Britain responded to the leaked EU report saying the EU's assessment was plain "wrong."

Darling told reporters in Brussels that Britain, which has stayed out of the eurozone, can ignore the calls to act and lean on its own judgment.

Some experts have warned of a possible double-dip recession if public spending is cut too deep, too soon.

Britain's state borrowing is expected to balloon to a record £178bn in the 2009/10 financial year, hit by multi-billion-pound banking bailouts and weak taxation revenues.

- AFP