Dec. 1 (Bloomberg) -- Euro-area finance ministers clashed over how much they should increase public spending to battle the first recession in their 15-nation economy.

Dutch Finance Minister Wouter Bos called on his colleagues meeting in Brussels today to punish countries that exceed the European Union’s 3 percent limit on budget deficits just as the governments of France and Spain prepare economic stimulus packages that will shatter those constraints. His German counterpart, Peer Steinbrueck, said the increased spending may be in breach of the EU’s Stability and Growth Pact.

If countries “end up with deficits larger than 3 percent, then the normal procedure needs to get started,” Bos told reporters. “We need to do something. It needs to be substantive. I don’t mind it being substantive as long as it’s temporary.”

European Commission President Jose Barroso said last week officials should exploit the “maximum flexibility” of the EU’s budget rules as he announced a 200 billion-euro ($250 billion) stimulus package. Countries may avoid punishment if deficits are “close” to the EU limit and breaches “temporary,” he added.

Still, the French government, which the International Monetary Fund expects to exceed the deficit ceiling this year, will boost spending by around 19 billion euros, or 1 percent of gross domestic product, to bolster economic activity, Finance Minister Christine Lagarde said last week.

Budget Woes

Spain’s government, which posted the bloc’s biggest budget surplus last year, is likely to exceed the limit through 2010, Finance Minister Pedro Solbes said last week. Spain has pledged around 30 billion euros for fiscal stimulus, equivalent to almost 3 percent of GDP, and its deficit will likely reach 4.5 percent next year, according to Dominic Bryant, an economist at BNP Paribas in London.

“For a country like Spain, which has already put in place a number of measures, this is enough in terms of fiscal policy,” Solbes told reporters today in Brussels.

Finance ministers will begin so-called excessive deficit procedures against all countries in breach of the pact early next year, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said. He said the pact allows countries to exceed the 3 percent deficit ceiling by “a few” tenths of a percentage point for one year.

First Recession

Europe’s economy fell into its first recession in 15 years in the third quarter after the worst financial crisis since the Great Depression pushed up lending costs, eroding confidence of investors and consumers. The malaise leaves the European Central Bank facing calls to accelerate the pace of interest-rate cuts this week.

Having reduced its benchmark rate by half a percentage point on two occasions since early October, investors are betting the Frankfurt-based bank may lower it as much as three-quarters of a point when its governing council convenes this week.

“The bank has room to maneuver” on interest rates, said Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-area finance ministers. “I think the bank” will “make wise use of” that.

ECB President Jean-Claude Trichet last week said that member states must respect the bloc’s budget rules even as they increase spending to support their economies.

“It is of the essence that the Stability and Growth Pact is respected,” he said Nov. 27.

German Chancellor Angela Merkel, whose budget deficit was 0.2 percent of GDP last year, said today her party will “swim against the tide” of calls to cut taxes in order to support consumer spending in Europe’s largest economy. Merkel’s Cabinet last month agreed on a program of measures costing 32 billion euros over two years, equivalent to 1.3 percent of its gross domestic product.

The euro-area economy will shrink by 0.5 percent next year as the world’s advanced economies suffer their first simultaneous recession since the Second World War, the IMF forecasts.

To contact the reporter on this story: Ben Sills at bsills@bloomberg.net

Last Updated: December 1, 2008 16:55 EST