Commission says it could suspend development funds to Greece

The European Commission threatened yesterday to suspend development funds to Greece in response to Athens's admission that it had disguised the extent of the country's debts in order to join the euro.

The warning came hours before the Greek Finance Minister, Mr George Alogoskoufis, sought to assuage Brussels by promising to trim the budget deficit.

Presenting a draft version of the 2005 budget to parliament, Mr Alogoskoufis said it would be easier to put Greece's economic house in order because spending on the Olympics no longer needed to be included.

Greece is believed to have spent at least €7 billion hosting the games, nearly double the original budget.

Mr Alogoskoufis said the centre-right government's aim was to bring the deficit within permitted EU limits by lowering it to beneath 3 per cent of GDP.

Revised figures released by Mr Alogoskoufis last week revealed that Greece's deficit averaged 4 per cent from the time it joined the single currency in January 2001, rather than the 2 per cent indicated by the former Socialist administration.

Had Athens made it known that budget deficit calculations were out by billions of euro, it might not have been allowed to adopt the euro.

Last week Eurostat, the EU's statistics office, announced it was considering legal action against Athens.

Commission officials said they feared the consequences of Greece's admission for the union's 10 new members, which, with the exception of Cyprus, are struggling to keep up with fiscal rules. Greece is eligible for €563 million in EU funds this year.

Meanwhile, some established members of the EU are also struggling to meet the fiscal rules and Germany's budget deficit next year is again likely to breach the European Union's Growth and Stability Pact, government officials admitted yesterday.

This raises the prospect of renewed confrontation with Brussels.

German Finance Minister Mr Hans Eichel remains committed to bringing the deficit below the pact's 3 per cent barrier in 2005, but the scale of the federal deficit this year means this appears hardly possible, officials said.

"Given the awful budget figures, [a breach of the 3 per cent barrier] is almost unavoidable," one official said.