THE EUROPEAN Commission has told the Government to take extra steps to tackle the budget deficit as it begins legal action against Ireland for breaching EU budget rules.

It said the decision to launch an excessive deficit procedure against Ireland and five other EU states was about boosting market confidence rather than exerting sanctions.

“During the recession the pact is not at all about sanctions,” said EU monetary affairs commissioner Joaquin Almunia yesterday. “Please don’t explain to the citizens that to implement the pact today is about sanctions. Nobody is thinking of sanctions.”

Under the EU’s stability and growth pact, member states are required to keep their budget deficit to Gross Domestic Product (GDP) ratio below a 3 per cent limit. In theory a government could face financial penalties if it failed to bring its deficit under control, although no state has ever been forced to pay a fine for breaching the pact’s limit.

The commission believes the Irish deficit was 6.3 per cent of GDP in 2008 and will widen to 9.5 per cent this year, prompting it to recommend action.

It also casts doubt on elements of the Government’s stability programme for 2008-2013, saying it lacks sufficient detail and describing its growth assumptions as “somewhat optimistic”.

“Given the situation of the Irish economy, given the situation of the Irish financial sector, given the size of the deficit and given the risks involved in this situation and the pressure of the markets that have increased the spreads on the CDS (credit default swaps), the fiscal consolidation should be more ambitious,” said Mr Almunia, who noted it was the financial markets, not the commission, that held real sanctions for governments.

Highlighting the strong market pressure currently being exerted on the spreads of Irish and Greek bonds compared to the benchmark German bonds, he said this was a reason to stick with the stability and growth pact.

“We think that the best way to react to this market pressure for these governments is to step up consolidation now in 2009,” he added.

The EU Commission’s recommendation to begin excessive deficit proceedings against Ireland will be debated and most likely approved by finance ministers in early April.

The only really sensitive issue left to be decided is the specific length of time that each EU state will be given to return its budget deficit below the 3 per cent limit in the pact.

Some member states, including the Czech Republic, which holds the EU presidency, want the fiscal consolidation to begin in 2010 while others are pushing for more time due to the severe economic recession.

Ireland’s updated stability programme envisages a return to below the EU limit by 2013 in spite of the commission’s ongoing concerns.

Mr Almunia signalled the commission would be generous in the time it will recommend giving member states in a report due on March 25th.

“The commission will use the full flexibility embedded in the revised stability and growth pact when considering the next steps under the excessive deficit procedure in the weeks to come”, he added.

The commission recommended opening excessive deficit proceedings against France, Greece, Latvia, Malta and Spain yesterday following an assessment of the deficits in 17 EU states. It will evaluate the stability programmes and budget deficits of the remaining 10 EU member states over the next few weeks to see if legal action should be triggered.