The European Commission has told the Government not to introduce another give-away Budget later this year. And the Commission has renewed its demand for action this year to reverse the inflationary impact of last December's Budget.

Unveiling this year's proposed Broad Economic Policy Guidelines in Brussels yesterday, the EU Economics Commissioner, Mr Pedro Solbes, acknowledged that Irish inflation is falling. But he indicated that the slowdown in the world economy would not be enough to offset the inflationary effect of last December's Budget.

EU finance ministers issued an unprecedented reprimand to Ireland in February over the Budget and Mr Solbes insisted yesterday that the fall in inflation had not changed his analysis of the Irish economy.

"It doesn't embarrass us at all. We're very happy that Ireland is doing so well. We have to do our assessment of the impact of budgetary policy in Ireland and we'll have to present that to the Ecofin council," he said.

Mr Solbes suggested that, although foot-and-mouth disease would have a bigger economic impact in Ireland than in some other member-states, its effect was unlikely to be significant.

Commission officials acknowledge privately that February's reprimand against Ireland may make it more difficult to persuade EU finance ministers to accept this year's Broad Economic Policy Guidelines. The guidelines will be discussed by finance ministry officials from the 15 member-states next month before being sent to the Ecofin council in June.

In yesterday's toughly-worded text, the guidelines state explicitly that the Government must introduce "countervailing budgetary measures during the current fiscal year" to offset the effect of last December's Budget. And they demand that the Budget for 2002 "contributes to an orderly easing of the pace of demand".

The Commission does not specify the nature of the action the Government should take but officials have indicated in the past that postponing elements of the National Development Plan could have the desired effect.

Yesterday's guidelines warn that labour shortages are becoming more widespread in Ireland and that wage inflation is accelerating. They call on the Government to promote wage developments that are "consistent with the maintenance of price stability" and to encourage more women to enter the workforce.

The Commission's latest economic forecasts, which were also published yesterday, identify Ireland as the EU economy most exposed to external shocks. Ireland and Germany are the EU member-states most vulnerable to a downturn in the US. And Ireland's large high-tech industry could be hit by a global fall in demand for information technology.

The Commission predicts that economic growth will fall by more than 3 per cent - from 10.7 per cent last year to 7.5 per cent this year. But this figure remains well above the expected growth rate of 2.8 per cent for the EU as a whole.

The Commission expects Irish inflation to fall to 4 per cent this year from 5.3 per cent in 2000. This is almost twice the expected average in the EU of 2.1 per cent.

The Broad Economic Policy Guidelines are part of a process of economic policy co-ordination within the EU that has grown in importance since the launch of the euro. Once the guidelines are approved by the member-states, each government is bound to follow them.

As the Minister for Finance discovered this year, however, there is no penalty for flouting the guidelines - apart from the embarrassment of being reprimanded by the other member-states.