/www.bloomberg.com/ By Emma Vandore
Brussels, Jan. 8 (Bloomberg) -- Germany, France and Italy, the three largest economies using the euro, will come under European Commission pressure today to curb spending or raise taxes to cut their budget deficits even as economic growth slows.
Germany overstepped the European Union's deficit limit last year, and may be followed by France in 2003. Italy needs to take more steps to reduce its debt, the highest in the 15-nation EU, the commission has said.
The economy of the 12 nations using the euro may contract as much as 0.2 percent this quarter, the commission estimates. Consumers, who were the most pessimistic in December in 5 1/2 years, are reining in spending, which accounts for more than half the region's $7 trillion economy.
``It's preposterous to ask them to cut deficits at this time,'' said Paul De Grauwe, a Belgian lawmaker who was his country's candidate for European Central Bank vice president last year. ``For Germany it is certainly misplaced -- there is no risk of debt crisis there and it will only make things worse.''
The commission, the EU's executive agency, will today recommend that German Chancellor Gerhard Schroeder's government take steps by May at the latest to bring this year's deficit below the limit of 3 percent of gross domestic product, commission spokesman Gerassimos Thomas said yesterday.
Germany is dragging down growth in Europe. The economy expanded no more than 0.5 percent last year, the Bundesbank estimated. Its deficit reached 3.8 percent, the commission estimates.
U.S. Deficit
While the EU leans on governments to cut deficits, the U.S. shortfall is widening. The U.S. posted a $159 billion deficit in fiscal 2002, ending four years of surpluses. A package of tax cuts announced yesterday by President George W. Bush is likely to further widen the gap, analysts said.
Today's recommendation by Monetary Affairs Commissioner Pedro Solbes will require the approval of European finance ministers, who meet Jan. 21. Germany raised energy taxes and social security contributions on Jan. 1 to plug the widening gap, leaving consumers with less money to spend.
The call for austerity comes as the EU tries to build more flexibility into the ``stability pact'' limits on deficits, denounced as ``stupid'' and ``rigid'' by the commission's president, Romano Prodi, last year.
A relaxation of the rules faces opposition from countries such as Finland, the only euro nation the commission expects to post a budget surplus this year.
German Strains
``It's certainly not going to be easy'' for Germany to meet EU demands, said Jacques Cailloux, an economist at Barclays Capital. ``The economy is weakening by the day, and needs to breath a bit without being weaned further.''
Germany, France and Italy account for three-quarters of the economy of the 12 euro nations. French President Jacques Chirac and Italian Prime Minister Silvio Berlusconi are grappling with expanding budget gaps as tax receipts slow and welfare spending increases.
``The governments of the major countries are reluctant to take further steps within the current sluggish economic climate,'' said Jean-Francois Mercier, an economist at Schroder Salomon Smith Barney in London.
France is heading for a deficit of 2.9 percent in 2003 and runs a ``clear risk'' of overstepping the limit in 2003, Solbes said in November. Slowing growth could further inflate the budget gap.
The French government based its 2003 budget on economic growth of 2.5 percent. Budget Minister Alain Lambert said Monday growth probably won't top 2 percent.
Italy has come under fire for not reducing its debt, which increased last year to 110.3 percent of GDP, the commission estimates.
The debt almost prevented Italy from adopting the euro and led Germany to devise the Stability and Growth Pact, which limits public borrowing to insulate the currency from inflation and keep interest rates low.
The commission will also examine budget plans until 2006 of Greece, Finland and Sweden.