Four nations risk breaking EU budget rules in 2016 - euro zone finanace ministers warn

By Jan Strupczewski and Francesco Guarascio

BRUSSELS (Reuters) - Euro zone finance ministers warned Italy, Spain, Austria and Lithuania on Monday against breaking EU fiscal rules with their draft budgets for 2016, endorsing an assessment last week by the EU executive.

Each year, euro zone governments send the outline of their draft budgets for the coming year to the European Commission, the EU executive, for checks that the plans are in line with EU laws on reducing budget deficits and public debt.

The Commission then issues an assessment of how each budget outline meets the rules of the 28-nation bloc and what is the overall fiscal stance for the euro zone.

This year, the Commission said Italy, Lithuania, Austria and Spain were at risk of breaking the rules and that France would fail to meet some fiscal goals set out by EU finance ministers.

The assessment was confirmed by the 19 euro zone finance ministers who gathered in Brussels on Monday for a Eurogroup meeting focussed on countries' compliance with EU fiscal rules, known as the Stability and Growth Pact.

"We recognise that, for a number of Member States, compliance with the rules of the Stability and Growth Pact is at risk," a joint statement said at the end of the meeting.

Italy, which has its nominal deficit within EU limits, is in trouble because it should now try to bring its public finances into balance in structural terms.

But instead of cutting the structural deficit, the draft budget envisages a widening next year.

"The Eurogroup broadly agreed with the European Commission analysis, meaning that Italy is deemed at risk of non-compliance with the Stability and Growth Pact," Commission Vice President Valdis Dombrovskis said at the end of the meeting.

The Commission will reassess Italy's situation in spring when it will decide whether to give Italy the additional fiscal leeway requested by Rome, Dombrovskis said, adding that Brussels will also monitor whether Italy made the necessary reforms.

Spain is in the spotlight because it is likely to see an increase in its structural deficit and will also overshoot its nominal deficit targets, according to the Commission.

But Spain holds a parliamentary election on Dec. 20 and the Commission is likely to wait until a new government sends in a refreshed 2016 budget proposal before taking any steps.

"It will be left to the next government which will, where necessary, take on new measures to ensure that its budget will be compliant," Eurogroup's head Jeroen Dijsselbloem said.

Austria and Lithuania also have problems with reducing the structural shortfall as required by the rules.

FRANCE

The French case is tricky because Paris is subject to EU disciplinary measures called the excessive deficit procedure (EDP). If France badly misses budget consolidation targets set by EU finance ministers, the procedure could be stepped up and end in a fine. But this would not happen, Dombrovskis said.

This is because unlike during the sovereign debt crisis, when the Commission focussed on the structural deficit which excludes the effects of the business cycle and one-offs, the emphasis now was back focussing on the nominal deficit number.

"According to our assessment, France is going to meet its nominal targets both this year and next. The practice is that if a country meets nominal targets, there is no case for stepping up the excessive deficit procedure," Dombrovskis said.

He reiterated that France was "falling substantially short of the necessary structural reforms" set by EU ministers.

French Prime Minister Manuel Valls said last week his country would overshoot not only the structural, but also the nominal deficit targets because of new security spending after the Nov. 13 attacks in Paris that killed 130 people.

However, French Finance Minister Michel Sapin said on Monday he would deliver on commitments to the EU.

France plans to increase by 600 million euros its deficit in 2016 to boost security expenses after the Paris attacks.

This increase was considered "manageable" by Dijsselbloem which saw no risks for France to go "off the rails".

(Reporting by Jan Strupczewski and Francesco Guarascio; Editing by Alastair Macdonald and Ralph Boulton)