Brussels gives seven states more time to fix budgets

Meanwhile, Belgium narrowly avoided a fine despite the commission judging that it had taken "no effective action" to correct its deficit over the past three years.

Under the EU's economic governance framework, countries can be fined 0.2 percent of GDP if they fail to take measures to reduce their debt and deficit levels.

Economic affairs commissioner Olli Rehn said the commission "had no choice but to say that Belgium did not take sufficient measures" although he blamed the inaction on the political crisis which left Belgium without a government for 18 months in 2010 and 2011.

Fining Belgium "would be neither fair or legally sound" said Rehn.

The EU executive has demanded a 1 percent reduction of Belgium's deficit in 2013 followed by 0.75 percent in 2014, alongside formal commitments to a 'balanced fiscal framework' to apply across all layers of government.

The reports are the third annual set of country-specific recommendations under the EU's new economic governance framework.

The country-specific recommendations go beyond the headline figures on debt and deficit levels, touching on sensitive areas of national policy such as wage-setting, social and welfare spending, which affect the state of public finances.

Although governments remain responsible for these decisions, the EU executive now has sweeping new powers to influence budgetary policy-making.

If the commission's recommendations are rubber-stamped by governments in June, 16 EU countries will be subject to an excessive deficit procedure (EDP) down from 24 in 2011, with Hungary, Italy, Latvia, Lithuania and Romania being taken off the EDP-list this year.

However, the bloc's smallest member state, Malta, is set to fall back into the EDP fewer than six months after it left it, with the Mediterranean Island's deficit projected to balloon to 3.7 percent this year.

Rehn singled out Italy for praise for having balanced its books "in a durable way". But those expecting stimulus measures and increased public spending will be disappointed.

Commenting that new Prime Minister Enrico Letta's government had only "a very small window for manoeuvre," Rehn added that the commission had sought assurances that the new government would put in place "strong safeguards."

But Rehn insisted that the commission's flexibility would not allow countries to escape their responsibilities, warning France that it was "crucial that it uses this extra time to overcome problems with its competitiveness".

A more positive tone was struck for Spain, which is to be given until 2016 to hit the 3 percent target and was praised for forward "a convincing reform programme."

For his part, employment commissioner Laszlo Andor said that nineteen member states had been told to reform their labour markets, while ten governments would receive instructions to take more action to reduce poverty.

Describing youth unemployment as "one of the biggest crises facing the EU," Andor called on governments to implement youth guarantee schemes to offer training, education or a job, and to offer special incentives for companies to hire young people.

All member states except for Finland and Denmark were given recommendations to revise their tax system.

Ten governments were told to reduce tax on labour by targeting property and environmental taxation, while a total of 13 member states were urged to improve their own tax governance to combat tax evasion and avoidance.

Setting out the state of the European economy, commission President Jose Manuel Barroso conceded that short-term recovery was still "handicapped by public and private debt," adding that "the current crisis is structural as well as cyclical."