THE EUROPEAN Commission is planning to give member states such as Ireland more flexibility to meet the budget deficit targets in the EU's stability and growth pact.

It is also preparing a multibillion euro loan to help rescue the Hungarian economy and measures to help European businesses survive the oncoming recession.

The EU executive is expected to announce a package of measures following an extraordinary meeting of all 27 commissioners today, which has been called to discuss the rapid economic downturn. Commissioners will debate a paper entitled How to move from Crisis to Recovery, which includes a recommendation to provide EU states with more flexibility when it comes to meeting the terms of the EU's stability and growth pact.

Under the pact, EU states are meant to keep their budget deficits below 3 per cent of gross domestic product (GDP) or face an excessive deficit procedure which could in theory lead to fines. But, due to the crisis, many EU states are expected to breach the strict 3 per cent limit next year. The commission wants to ensure it works with member states rather than create unnecessary political friction.

Ireland's budget deficit is set to reach 6.5 per cent of GDP next year - a figure that would normally trigger an excessive deficit procedure. But the commission's new guidelines may provide more flexibility to the Government to agree a plan with the EU executive to bring its deficit below the 3 per cent level before punitive action.

Economic affairs commissioner Joaquin Almunia is expected to signal today that he will distinguish between cyclical factors dragging down EU states' economies - such as the current financial crisis - and poor policy when he assesses national deficits. This could provide the Government some wriggle room when it comes to its ballooning deficit.

The commission will also try to prepare a common EU position to bring to a summit of world leaders on November 15th, aimed at agreeing new foundations for the global financial system. They will discuss a range of regulatory measures being prepared by internal market commissioner Charlie McCreevy and some short-term measures aimed at easing the credit crunch and helping businesses ride out the recession.

Proposals include asking EU states to recapitalise the European Investment Bank (EIB) in an effort to make more money available to small and medium-sized businesses. There are concerns many small businesses will face closure as banks continue to hoard cash and refuse to lend money.

Italy and France have been pushing hard to make the commission relax its rules on state aid to enable them to offer more support to vulnerable industries. But competition commissioner Neelie Kroes is fighting to uphold EU competition and state aid rules, warning yesterday there is "no national route out of this crisis".

"It would be a disaster to start a subsidy race with member states spending money not to deal with the underlying problems, but to deal with the problems caused by other member states' subsidies," said Ms Kroes, who approved a €500 billion German rescue plan for its banking system.

Meanwhile, the EU executive said yesterday it was preparing a loan to help Hungary stave off possible financial collapse. The multibillion-euro EU loan will be in addition to support offered to Hungary by the International Monetary Fund. It will be raised on the international money markets and administered by the European Central Bank.

The EU regulation allowing the disbursement of loans says they can be granted to countries that are "experiencing or are seriously threatened with difficulties in their balance of current payments or capital movements".

Italy received a similar €4 billion loan in 1993.