Brussels calls on Italy to cut deficit by 2007

According to the commission's data, Italy's deficit stood at 3.2 percent of GDP in the two preceding years, and it is projected to reach 3.6 percent this year and 4.6 percent of GDP in 2006.

Silvio Berlusconi's government has also been asked to cut down its long-term public debt that currently stands at 106 percent of GDP - the second biggest after Greece - compared to the 60 percent eurozone limit.

The timetable proposed by the commission makes it possible for Mr Berlusconi to avoid unpopular spending cuts before next year's general elections, although "at least half of the correction should take place by 2006".

Finance ministers are expected to hammer out final details of the commission's proposal at a meeting on 12 July.

Monetary affairs commissioner Joaquin Almunia admitted the whole procedure was going to be an "important test" of the new stability and growth pact as Italy is first key case evaluated under the rules as revised in March.

"We are all interested in increasing fiscal discipline, particularly in the moments we are living," he said, pointing to the political crisis in Europe due to the failed referendums on the EU constitution, as well as the gloomy economic situation in the union.

Two years instead of one

Both the old and revised eurozone rules suggest that countries with excessive deficits should get them back on track after one year, unless there are "special circumstances", recognised by the EU executive.

That has not been so in Italy's case. But Mr Almunia suggested that while "rapid correction" of its budgetary situation is necessary, 2007 is a "more appropriate deadline" because of the country's weak economy and the great structural changes needed.

The EU executive will later assess the measures proposed by the government and say if they are efficient. Rome is required to cut its structural deficit by at least 1.6 percent of GDP over 2006 and 2007.

According to the Italian economy minister Domenico Siniscalco, the commission's proposal is "balanced" and will be accompanied on the Italian side by a 2006 budget "aimed at economic growth in a framework of stability", he said in a statement.

The new four-year budgetary plan will be presented at the Italian cabinet's meeting on Friday.

Mr Berlusconi announced today that the 2006 budget will include net deficit-cutting measures worth around €10 billion, but no "mini-budget" for this year with more cuts is expected, according to wires.

Some economists are pessimistic about the effectiveness of the whole procedure.

"It's going to be mostly a lot of talk at this point, but little truly efficient action on both sides", Daniel Gross, director of the Brussels-based Centre for European Policy Studies told EUobserver.

"It will just go on the way it used to be. A country finds itself in deficit, then gets two years to repair its problem but then in some time gets it back to the same level", he said, adding he did not expect the current Italian cabinet to really change anything or implement stricter measures given its political priorities before the elections.

Italy is one of ten other EU countries with excessive deficits, joined by France, Germany, Greece, the Czech Republic, Cyprus, Hungary, Malta, Poland and Slovakia.