Italy and Spain close to breaking euro rules

EU economic affairs commissioner Olli Rehn described the first ever use of new economic governance rules, which require euro countries to submit their budgets for review in the EU capital each October, as a "milestone."

"We have made sure that member states practised what they preached," he said on euro rules which limit public debt and deficit.

Italy and Spain - the eurozone's third and fourth largest economies - as well as Finland, Luxembourg and Malta were told they are at risk of breaching the stability and growth pact.

All five countries were urged to "take the necessary measures" to bring their economies back into line.

Austria, Belgium and Slovakia were told their budgets were "broadly compliant" with euro rules. France, the Netherlands and Slovenia were told they were "compliant" but "without any margin for possible slippage."

Bailout countries Cyprus, Greece, Ireland and Portugal were not part of the assessment.

Although the commission identified some large problems in the some of the national budgets - such as the fact that Italy's debt reduction targets for 2014 will not be met - it did not use the biggest weapon in its armoury.

It said none of the assessed countries had been found in "serious non-compliance" with euro rules, so it is "not necessary to request revised budgetary plans."

Rehn denied the commission is taking a soft approach for the first airing of the rules and avoiding the politically sensitive issue of asking a country to change its spending plans.

But he hinted that next time round, the commission would be more rigourous: "I am sure we will improve the methodology in the future."

With increasing concern about the extent to which Brussels can now manage national budgets - a response to the financial crisis - Rehn was keen to say the process is for the member states' own good.

"The exercise is much more about partnership than penalties," he said.

But the assessment is likely to be met with annoyance in at least one member state - Italy.

The country was told that it would be unable to exempt the public funds it uses for investment from counting up its debt, a clause it had been hoping to take advantage of.

Rehn had little sympathy for the argument that the setback comes as at sensitive time in Italian politics, with the country trying to stabilise itself after months of politically uncertainty.

"Every day this year has been a politically sensitive moment in Italy," the commissioner said.

Meanwhile, even the eurozone's best pupils came under fire.

Rehn noted that Germany had not made any advances on the structural reforms recommended to it by the commission in summer and last year.

He is due to discuss Friday's findings with euro countries in a week's time.

He noted that the commission had learned it needs fewer "overlapping" recommendations for member states, with countries previously in breach of euro rules having multiple sets of instructions from Brussels.

But he said Brussels' increased powers of scrutiny are having an effect.

He noted that fiscal deficits "continue to come down in the European Union from about 6-7 percent to above 3 percent this year and below 3 percent next year."