The European Commission told France, Italy, Greece and Portugal on Monday to take advantage of a recovering eurozone economy and step up efforts to cut budget gaps to comply with European Union requirements.
"At a time when growth is perking up and we are in a phase of recovery, we must not forget to pursue fiscal consolidation during good times," EU Monetary Affairs Commissioner Joaquin Almunia told a news conference.
The Commission raised its economic growth forecast for the 12-nation eurozone for this year by 0.2 percentage point to 2.1 percent, citing a stronger German economy, investment, global growth and some improvement in private demand.
But it said that despite stronger growth, Italy would miss a 2007 deadline set by EU finance ministers to reduce its budget deficit unless it took additional measures to tighten fiscal policy in the budget for next year.
With no policy change also Greece and France will see their budget deficits rise above the EU ceiling of 3 percent of gross domestic product next year, while Portugal will badly overshoot its deficit reduction plan, which has a 2008 deadline.
The estimates show the challenges facing the next French president after elections next year and also Italy's new prime minister, Romano Prodi, who has the task of shoring up public finances in the eurozone's third-largest economy.
Italy has been in breach of the EU's budget rules, designed to curb government borrowing and safeguard the euro, in four of the last five years.
The Commission's latest projections could herald a stepping up of EU action against Rome - possibly leading to heavy fines eventually - unless Italy takes the additional measures.
On current policies, Italy's budget gap will not fall at all this year from 4.1 percent of gross domestic product and rise to 4.5 percent in 2007, the EU executive said.
But Almunia said he had spoken to Prodi and was sure Rome would cut the deficit.
"I am convinced the government will do it," Almunia told reporters. "I have been in contact with Prodi before and after the elections. He knows perfectly well what to do. I agreed with their intentions. Now the question is what are the measures."
Italy has forecast it would cut its deficit to 3.5 percent of GDP this year but the Commission report was sceptical.
"Given the record of regular overruns ... the Commission services are more prudent in their assessment of the size of savings foreseen in the 2006 Budget Law through substantial cuts on health care and other government expenditure, in particular of local government," it said.
Almunia said he was optimistic EU finance ministers would suspend budget discipline action against Germany in July when they review measures taken by Berlin to cut its deficit including in the draft 2007 budget.
Germany has broken the EU ceiling every year since 2002, and EU ministers gave Europe's biggest economy until 2007 to bring the deficit back in line. But even though economic growth in Germany will almost double to 1.7 percent this year, its budget deficit will fall significantly below 3 percent only next year.
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