“We are living in exceptional conditions: the menace today is not inflation, the threat today is deflation, the risk today is a recession,” he said in a news conference after a summit of global leaders hosted by U.S. President George W. Bush.

The EU commission forecasts that the economy in the 15 countries that use the euro may already be in a recession and will barely grow next year, expanding just 0.1 percent as the financial crisis hits hard.

Germany plans to boost its economy through a program of public spending and tax breaks and France has called for industry to receive state help to ride out the slowdown.

The costs of such programs after the bailing out of troubled banks while tax revenues shrink and welfare payouts swell will see governments pile on debt and run bigger deficits, the EU executive warns.

It says France and Ireland will break EU budget rules in 2009 by running a yearly government deficit of more than 3 percent of GDP.

The ceiling is intended to keep their shared currency stable. Britain, Latvia, Lithuania, Romania and Hungary will also likely exceed the limit.

Barroso said the EU is working on new ideas to boost growth and that governments should be allowed some flexibility under EU budget rules known as the growth and stability pact.

“The stability and growth pact in Europe allows in exceptional conditions exceptional measures,” he said.

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