Lenihan to raise breach of budget deficit rule at EU level

MINISTER FOR Finance Brian Lenihan is to discuss with his European counterparts whether or not Ireland will be liable for fines when it breaks the rules governing the operation of the euro zone this year.

Mr Lenihan yesterday briefed an informal meeting of European Union finance ministers and central bankers in Nice on the economy and indicated that the Government would run Budget deficits this year, and next year, in excess of the 3 per cent of GDP imposed on euro zone members.

A spokesman for the Minister said he was "pleased with the reaction and the the willingness of the European Commission to keep an open mind on the issue". He said that there would be further talks today, including the issue of whether the scale of the economic slowdown was sufficient to allow Ireland to break the deficit rule without incurring a financial penalty.

Speaking after the meeting, Commissioner for Economic and Monetary Affairs Joaquin Almunia seemed to accept that the speed of the Irish economic slide was exceptional.

Mr Lenihan indicated two weeks ago that the deficit rules would be broken when he announced that the Budget was to be brought forward to October.

Europe's highest-ranking economic policymakers also denied that the euro zone was on the edge of recession and said they saw no need for a US-style fiscal stimulus to revive growth.

At the same time the euro zone's 15 finance ministers made clear their doubts on the likelihood of a rapid, export-driven recovery by saying they viewed the euro's external exchange rate as overvalued, in spite of a recent decline from all-time highs.

As they began their talks the weakness of the euro zone economy was underlined by official statistics that showed month-on-month industrial production had dropped by 0.3 per cent in July after a fall in June of 0.2 per cent.

The commission sharply cut its 2008 euro zone growth forecast on Wednesday to 1.3 per cent, from an April prediction of 1.7 per cent, and said technical recessions - or two consecutive quarters of negative growth - were probable in Germany, Spain and the UK. In the second quarter of this year the euro zone economy shrank by 0.2 per cent, the first such contraction since the introduction of the euro in 1999.

"The slowdown is more marked than we had expected before the summer," Jean-Claude Juncker, chairman of the euro zone finance ministers, said. "After a dynamic first quarter . . . we were expecting a slowdown in economic activity, but nothing so pronounced."

However, he added: "It should not be said that Europe is on the brink of recession."

He said that the fall in oil prices from a July high above $147 a barrel had provided some grounds for satisfaction, adding: "The recent depreciation of the euro is welcome, even if the euro remains overvalued."

Additional reporting: Financial TimesService