THE EUROPEAN Commission has said it will recommend opening an excessive deficit procedure against Ireland because of its spiralling budget deficit.

Economic and monetary affairs commissioner Joaquin Almunia announced the decision yesterday at the publication of EU economic forecasts, which predict the exchequer finances will be in a worse state than the Government expects in 2009.

"In the summer there was a big surprise for everybody how the public finance position in Ireland deteriorated very, very rapidly," said Mr Almunia. "It is obvious now that the forecast is published that we will start the procedures for an excessive deficit procedure."

Under the EU stability and growth pact, Union states are required to keep their budget deficit to gross domestic product (GDP) ratio below a 3 per cent limit. Moreover, they are obliged to maintain a debt/GDP ratio below 60 per cent to ensure the smooth operation of the euro currency. In theory a government could face financial penalties if it failed to bring its deficit under control, although in practice no member state has been forced to pay a fine after breaching the limits in the pact.

The commission is forecasting an Irish budget deficit of 6.75 per cent of GDP in 2009, which is a quarter of a percentage point more than the Government's recent forecast. It also predicts the economy will contract by 1 per cent in 2009, compared to a Government prediction in the budget of a decline of 0.75 per cent.

Mr Almunia pinpointed the collapse of the Irish housing market and the problems experienced by the banking sector for the severity of the economic downturn.

Economic forecasts show the commission expects unemployment to reach 7.5 per cent in 2009. This figure would be higher except for a predicted slowdown in immigration prompted by the downturn. Increased borrowing over the next two years will cause the national debt to almost double to 46 per cent of GDP in 2010, from under 25 per cent in 2007.

On the positive side inflation is predicted to fall to 1.8 per cent in 2010, down from 3.3 per cent in 2008, and the commission expects the Irish economy to recover in the last quarter of 2009 and expand by 2.4 per cent during 2010.

Ireland is not the only country facing a steep drop in economic growth and widening budget deficits. Economic growth in the euro currency area will slow to 0.1 per cent in 2009 from 1.2 per cent expected this year, prompting the commission to warn that recession was a real risk.

"The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumers," said Mr Almunia, who noted that he expected at least seven countries to breach the 3 per cent budget deficit rule in 2009.

Greece, Latvia, Lithuania, France, Romania, the UK and Hungary are all expected to exceed the terms of the EU stability and growth pact in 2009 as the downturn takes hold.

EU finance ministers meet in Brussels today to discuss how the financial crisis is retarding economic growth amid calls for more co-ordinated action. "We need co-ordinated action at the EU level to support the economy similar to what we have done for the financial sector," said Mr Almunia.

But Dutch finance minister Wouter Bos yesterday rejected the idea of any EU-wide measures and said the main areas of economic policy co-ordination were the EU budget rules, called the Stability and Growth Pact, and the European Central Bank.