The European Commission said yesterday that it was ready to fine Europe's biggest economies if they kept breaching the region's budget deficit limits, and took particular aim at France, which is defiantly planning tax cuts.

Paris immediately hit back, with Prime Minister Mr Jean-Pierre Raffarin telling one senior EU official who issued the warning, European Trade Commissioner Mr Pascal Lamy, to mind his own business.

Germany and France broke the European Union deficit cap of 3 per cent of gross domestic product last year, expect to do so again this year and, under EU rules, should risk fines if they top that limit for a third year running in 2004.

Both countries face an uphill task to cut their deficits as sluggish economic activity is depressing tax revenues, but the tax cuts planned by France's conservative government are adding to risks that Paris will breach EU rules for a third year.

"We shall be reminding France of its obligations and then the question is whether we throw the book at it," Mr Lamy said.

The tough words from Mr Lamy, who has previously admitted the need to revamp the EU's Stability and Growth Pact on budget discipline, suggest the Commission is hardening its line with Paris and gearing up for a showdown.

Mr Raffarin, who met Mr Lamy earlier yesterday, raised the stakes. "I would like Pascal Lamy to be very scrupulous in the way he exercises his prerogatives. His mandate is to negotiate the Cancun accords [on world trade]," he said with barely concealed irritation.

"He should bring this work to a conclusion satisfactory to all of us," Mr Raffarin added, speaking at a round table organised by his conservative UMP party. "I looked him in the eye and told him that straight, with determination. He should stick to his mandate and nothing but his mandate," Mr Raffarin said.

Meanwhile, EU Competition Commissioner Mr Mario Monti said the EU executive did not buy the argument that fines, the ultimate sanction against repeat budget offenders, might kill any nascent recovery.

"\\ would not have a heavy financial effect, so they would not slow growth," Mr Monti said. "It would maintain confidence in the euro without having a recessionary backlash on the economy."

The Commission made it plain it would have no qualms about calling for fines against either France or Germany, despite their economic clout. - (Reuters)