Behind the surprise blocking by Italy of the hard-fought deal on the taxation of savings lies a refusal by some EU Member States to agree to a request from the UK, France and Germany to discuss reforms of Europe's fiscal Stability Pact rules which would likely result in a loosening of Europe's deficit rules. These are due for discussion at a European Ministers meeting in Brussels on March 20th.

The Italians threw their new spanner in the works by demanding a menu of unrelated concessions, including changes to the treatment of cross-border taxes, revised diesel duties for the Italian trucking industry, and revisions to the taxation of energy products, as well as to milk quotas.

The call by Europe's 'Big Three' to re-appraise the Stability Pact fiscal rules has irritated smaller states who believe they have taken greater steps to limit government borrowing, and who are opposed to any dilution of the pact which sets an upper limit of 3% on national Budget deficits. With European enlargement due by May 2004, the issue could also complicate accession negotiations between Brussels and the ten applicant counties.

Friday's meeting, which was thought to be a routine affirmation of the agreement reached in January after 10 years' negotiation tightening the tax treatment of cross-border savings, and on a regime to tax savings hidden by its residents in secret bank accounts in third party countries, is also due to be signed by Ministers at the EU Summit on March 20th. Prior to Friday's meeting it was thought the package was only awaiting the final go-ahead from Switzerland, the most significant of the third parties involved.

Under the Savings Tax Directive, most EU Member states will begin to exchange information about their residents' tax liabilities, although Austria, Belgium and Luxembourg will retain banking secrecy in exchange for imposing a withholding tax on savings.