In addition to Germany and Italy, the Commission on Wednesday also began a budget scrutiny process against Austria, Belgium, the Czech Republic, the Netherlands, Portugal, Slovakia and Slovenia about their budget deficits.

According to the Commission, the EU's executive arm, 20 of the bloc's 27 member countries are on track to break that limit this year.

In July, Brussels launched action against Latvia, Lithuania, Malta, Poland and Romania following earlier procedures against France, Greece, Ireland and Spain.

EU blames recession for budget woes

The Commission blamed the ballooning budget deficits on the global recession, admitting that several EU governments had increased their public spending to limit the impact of the economic crisis.

Several EU countries are grappling with falling tax revenues and rising unemployment and many have initiated economic stimulus measures and bail-outs for banks and leading companies.

"A large majority of EU member states are set to have budget deficits above 3 percent of GDP in 2009 as a result of the economic crisis. We need to continue supporting the economy until the recovery takes hold, in line with the European Economic Recovery Plan," Economic and Monetary Affairs Commissioner Joaquin Almunia said.

But the commissioner also warned that EU governments need to rein in public spending and bring their public finances back in order.

"Now is also the moment to design coordinated exit strategies so that, when the moment is right, we can begin to roll back the soaring debt levels," he said.

Almunia said the Stability and Growth Pact under which the action was taken "is sufficiently flexible to combine the fiscal stimulus in the short term with consolidation of the public finances in the medium term."

Germany grapples with soaring deficit

Germany's budget deficit will be 3.9 percent of GDP this year and 5.9 percent next year, the Commission said. The recession in Europe's largest economy has slashed tax revenues and increased government spending on subsidies.

Leaked government documents in Germany this week said that public deficits need to be cut by 40 billion euros ($56 billion) between 2011 and 2013.

Germany's soaring deficit is also a bone of contention for the country's next center-right government. The pro-business FDP party, which is set to form a coalition with Chancellor Angela Merkel's conservatives, won the election largely on the back of promised tax cuts.

But Merkel has warned that the spiraling budget deficit reduces the scope for immediate tax relief, and that there won't be any cuts before 2011.

The Commission has estimated a deficit of 4.5 percent for Italy, 3.4 percent in the Netherlands and 6.5 percent in Portugal.

Europe still suffering from downturn

Europe hit a recovery setback on Wednesday with the euro-zone economy shrinking more than expected.

Finance ministers from the 16 nations that use the euro agreed last week at a meeting in Sweden that their countries would have to take action in 2011 against debt and public deficits.

The pact "must not be interpreted as offering one-way flexibility," euro-group head and Luxembourg Prime Minister Jean-Claude Juncker warned.

The Stability and Growth Pact was established in the 1990s to boost confidence in the euro. In 2005, the pact was loosened, making it easier for countries breaching the 3 percent limit to avoid sanctions.

Nations that overshoot the EU deficit limit can be subject to economic sanctions, though none have so far been fined.

sp/AFP/Reuters/dpa
Editor: Nancy Isenson