The European Union's much-flouted budget rules are too strict, the European Commission acknowledged yesterday, suggesting the scope of a crucial get-out clause could be widened to introduce more flexibility.

It also gave six of the EU's newest member-states leeway on stemming the flow of red ink, but told Greece to bring its deficit below the EU cap of 3 per cent of gross domestic product by 2005, the same deadline set for Germany and France.

European Monetary Affairs Commissioner Mr Joaquin Almunia said elements of the Stability and Growth Pact, which underpins the euro, were too rigid.

This is a charge already made by the euro-zone's biggest economies, France and Germany, which have broken - or risk breaking - its rules.

"The experience of the last five years has demonstrated that, in some cases at least, the regulations might have been too stringent and reduced our room for manoeuvre," said Mr Almunia, the Commissioner responsible for the enforcing of EU budget discipline.

Without making formal proposals on how to change the rules, he indicated the EU executive would consider loosening the pact's get-out clause by redefining the circumstances which warrant leniency on budget offenders.

EU advisers last year suggested the conditions should be changed so that a country can break the EU deficit cap if its economy contracts at all for a year, rather than only if it shrinks by at least 2 per cent (as under the current rules).

Mr Almunia also said more account could be taken of debt, states could be treated on a more case-by-case basis, the rules should take more account of economic downturns, and there could be incentives to improve budget positions in good times.

Mr Almunia said that the aim was to "create incentives for better compliance but also use more often the possibility to issue warnings or recommendations in case of non-compliance". - (Reuters)