The European Commission has confirmed that France has failed to take effective action to bring its budget deficit into line with the Stability and Growth Pact.

The Commission will draw up detailed recommendations for France over the next two weeks but officials expect Paris to be given an extra year to bring its deficit below 3 per cent of GDP.

France, which has promised €3.5 billion in tax cuts next year, expects a budget deficit of 3.6 per cent in 2004, compared with 4 per cent this year.

The forecasts mean that France would be in breach of the euro-zone budget rules for the third year in succession, a development that can trigger sanctions, including financial penalties.

EU finance ministers meeting in Luxembourg this week made clear that they have little appetite for punishing France, which argues that drastic action could push its sluggish economy into recession.

The Commission said that Paris had taken a number of steps to cut its deficit and had implemented an important pension reform.

However, it had not done enough to comply with orders issued by EU finance ministers in June. "The Commission is honouring its obligations... as well as its political commitment given in the European Council resolution on the Stability and Growth Pact for a strict, timely and effective functioning of the pact," a statement said.

Finance ministers hope that the Commission will negotiate with France a package of deficit-cutting measures that will bring the deficit below 3 per cent in 2005.

France has made clear that it will not abandon policies designed to boost economic growth in the euro-zone's second-biggest economy.