The  European Commission warned yesterday that Ireland should not continue unchanged its tradition of national deals on setting wages. The document approved yesterday by the college of Commissioners calls on the Republic to "reconsider" the social partnership tradition given "the major changes in the economy, such as the move to conditions of close to full employment".

The Commission warns against making binding public finance commitments as part of the wage-setting framework. "It may give rise to pro-cyclical effects, limit fiscal flexibility and reduce the feasibility of defining and adhering to spending targets," the Commission report says.

The report acknowledges that social partnership has been "an important factor in the development of the economy since 1987" but it urges changes to adapt to "sectoral differences in productivity and skills demand".

The comments were included in an assessment of the extent to which Ireland has complied with the Broad Economic Policy Guidelines, the rules that are supposed to advance the EU's medium term economic policy. The Commission warns that the Republic has not done enough to permit or encourage competition in certain industries, particularly energy and telecoms.

"Whilst Ireland has taken measures to increase competition in some markets and adopted a new Competition Act in 2002, there remains an insufficient degree of competition in some sectors of the economy, in particular the network industries," the report says. "Incumbent firms (mostly State-owned) continue to have high market shares and further policy measures are required if there is to be more competition from new entrants in the network industries."

The report adds: "Several other service sectors, such as professional services, retail distribution (including the drinks trade in particular) and insurance, would benefit from increased levels of competition."

Two years ago, the equivalent report criticised the potential inflationary effect of Mr McCreevy's tax cuts, sparking a row between the Minister for Finance and the Commission. This time round, the report's comments on the public finances are much more restrained, though the Commission still concludes that fiscal policy will prove to have been expansionary in 2002 rather than neutral.

The Commission is still assessing Ireland's budget for 2003 and will publish its opinion probably next month. For the moment, it contents itself by reporting that a slight budget deficit is expected in 2002.

Reports on every EU state were published yesterday, as part of the preparations for a European Council in March which is supposed to advance the agenda of economic reform agreed by the EU leaders in Lisbon in 2000.

The Commission's overall conclusion is that the pace of structural reform, which lost momentum in 2001, was not stepped up in 2002. Mr Pedro Solbes, the European Commissioner for Economic and Monetary Affairs, said: "The overall picture is rather disappointing."