The European Commission has recommended issuing an unprecedented "early warning" to Germany and Portugal because their budget deficits are too high.

The measure is more serious than last year's reprimand against Ireland for breaching the Broad Economic Policy Guidelines but still requires support of a qualified majority of EU finance ministers.

Defending the recommendation, the Economic Affairs Commissioner, Mr Pedro Solbes, said it was clear the two states had failed to meet budgetary targets by a very wide margin. "The credibility of the pact is at stake. The facts are clear cut. If the Commission and Council fail to take action in these clear-cut cases, it is difficult to see when an early warning could ever be issued," he said.

Mr Solbes said Germany's high budget deficit, which reached 2.6 per cent of GDP last year, was due mainly to the global economic slowdown. He did not criticise the economic policies pursued by the finance minister, Mr Hans Eichel, but warned that Germany must stick firmly to the terms of its budget for this year. "The Commission proposal does not state that Germany should raise taxes or cut expenditures. Instead, it makes clear that Mr Eichel's 2002 budget should be implemented as planned," he said.

Mr Eichel played down the Commission's recommendation, stating he and Mr Solbes agreed on the need for budget consolidation. But he is likely to seek to persuade other finance ministers to amend the Commission's proposal when they meet on February 12th.

The early warning can only be issued if a qualified majority of EU finance ministers approves it.

This means three large member-states could block the Commission's proposal. France and Italy have hinted they are reluctant to trigger the early warning mechanism, which can ultimately lead to large fines if a member-state breaches the 3 per cent budget deficit ceiling.

The Minister for Finance, Mr McCreevy, has warned that the Commission and finance ministers must be seen to be even-handed in censuring member-states. Mr Solbes claimed yesterday that the Commission's assessment system guaranteed equal treatment for all member-states.

In this year's assessment of Ireland, the Commission predicted the Government's budget would remain in surplus this year, but slip into deficit next year.