Nederland en Italië schenden Stabiliteitspact (en)

The European Commission is expected this week to issue an early warning to Italy and the Netherlands for breaking the rules underpinning the euro, reawakening the long-running dispute over the EU's economic regulations.

According to press reports, Italy will receive the rebuke - equivalent to a 'yellow card' - because it risks exceeding the three percent of gross domestic product deficit limit imposed by the EU.

The Commission is also unhappy that Rome has taken one-off economic measures to reduce the debt rather than structural reforms demanded by Brussels.

And the Netherlands - one of the staunchest supporters of the beleaguered rules - will also find itself in the dock for breaching the deficit limit.

The European Commission is expected to confirm the warnings on Wednesday when it unveils its economic report cards for EU states.

Internal politics

The rebuke to Italy - which emerged during a meeting of Finance Ministers in Punchestown, near Dublin in Ireland over the weekend - prompted some to accuse Commission President Romano Prodi of interfering in domestic politics.

Mr Prodi has become increasingly active in Italian politics in recent months and his rebuke to current leader Silvio Berlusconi over his handling of the Italian economy may improve the chances of his centre-left coalition in forthcoming European elections.

The Financial Times cited a witness who said that Italy's finance minister Giulio Tremonti reacted with "absolute fury".

In the same boat

Italy and the Netherlands will at least have some company in the Commission's bad books. France and Germany have broken the limit repeatedly in recent years and would be facing disciplinary measures if they had not persuaded other finance ministers to suspend the procedure last November.

Portugal has also received early warnings in the past and many believe Britain and Greece are approaching a rebuke - although the UK does not have to adhere to the rules as it has not adopted the euro.

This has prompted some EU states to call for a change in the rules - known as the Stability and Growth Pact.

According to Reuters, Italian prime minister Silvio Berlusconi said at a business conference in Milan over the weekend, "we cannot not undertake a reconsideration of the Maastricht Pact".

Austrian finance minister Karl-Heinz Grasser - another staunch advocate of the pact - said, also according to Reuters, "A new start with a credible Stability and Growth Pact would make sense".

And Luxembourg prime minister Jean-Claude Juncker - who doubles as his tiny country's finance minister - said in an interview with French daily Le Monde that he wanted "to ensure that the pact is remodelled at the start of 2005", when Luxembourg takes over the rotating EU Presidency.

Budget discussions overshadowed

This latest row over the euro rules overshadowed the main business of the day - a discussion on the future funding of the EU from 2007 to 2013.

The meeting was expected to see a showdown between the Commission - which intends to boost spending during this period - and the main contributors to EU coffers, who hope to limit the EU budget.

Nevertheless, Mr Prodi challenged member states to explain where the money should come from if the budget was capped, as six member states - France, Germany, the UK, Sweden, the Netherlands and Austria - have demanded.

"The member states have to say which spending they want to be cut", he said, according to the Italian media. "There cannot be contradictions between political objectives and spending".

Two-horse race

The competition to become managing director of the International Monetary Fund became a two-horse race at the meeting.

Ministers have narrowed down the selection to France's Jean Lemierre, head of the European Bank for Reconstruction and Development and Rodrigo Rato, the outgoing Spanish Finance Minister.

Italian competition commissioner, Mario Monti, appears to be out of the running.

The final choice for the post - which traditionally is awarded to a European - will be made within the next two weeks.