Portugal first to be warned on deficit

Portugal has become the first euro zone nation to receive an 'excessive deficit procedure' from the rest of the EU in a warning to get its finances in order, EU officials have said.

At a meeting of EU finance ministers in Brussels, Portugal was issued with a set of belt-tightening recommendations after allowing its public deficit to blow out to 4.1% of gross domestic product last year, the sources said.

Under the Stability and Growth Pact, the 12 nations in the euro zone are required to keep their deficits below 3% of GDP.

The government in Lisbon has already launched tough spending cuts and tax hikes in a bid to force the deficit down.

Last night, euro zone finance ministers sought to paper over their divisions over the growth and stability pact. The chairman of the euro group of finance ministers, Greek finance minister Nikolaos Christodoulakis, said there was a 'very wide consensus' supporting the pact, which focuses on limiting deficit levels.

But while denying a report that France and Germany had proposed a fundamental reform of the pact, officials admitted that there were calls for greater emphasis on economic criteria other than deficits.

European Commission President Romano Prodi sparked a barrage of criticism last month when he described the pact, which notably limits public deficit levels to 3% of GDP, as 'stupid'.

The debate has intensified as several countries, including France and Germany, inch towards violating the pact as they struggle to cope with the global economic slowdown.

Smaller EU countries, many of which have implemented painful measures to keep to the stability pact, are particularly angry at what is seen as attempts by the big countries to wriggle out of its terms.

Their concern was fueled hours before last night's meeting in Brussels, when the French and German finance ministers said they wanted five new 'parameters' gradually introduced to improve its quality.

Speaking in Berlin, French finance minister Francis Mer said the measures would cover inflation, employment, the budget deficit, state borrowing and pensions.

But after the Brussels meeting, European Monetary Affairs Commissioner Pedro Solbes downplayed the reported Franco-German initiative. 'All these supposed new criteria are nothing new actually, but they are essential targets of the stability and growth pact,' he said.

Monday's meeting examined the situation of the four euro countries whose finances are in the worst shape - France, Germany, Italy and Portugal. Solbes confirmed that France and Germany face disciplinary action this month.