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Last Updated: Tuesday, 13 July, 2004, 19:17 GMT 20:17 UK
Court overturns finance ministers
Euro banknotes
France and Germany have freely flouted the stability and growth pact
The European Court of Justice has annulled a decision by EU finance ministers to suspend action against Germany and France over budget deficits.

Giving its verdict on a case brought by the European Commission, the court said the ministers' decision was not compatible with EU law.

Before the ministers got involved, the commission had been planning to penalise or even fine the two nations.

This is because France and Germany keep breaking the Stability and Growth Pact.

'Brave decision'

The pact is meant to keep the deficits of eurozone states below 3% of GDP, but several - most notably France and Germany - have breached it.

The pair are on track to breach the deficit ceiling for the third year running.

The council of finance ministers cannot depart from the rules laid down by the treaty
Judgement of the European Court of Justice

In its ruling the European Court of Justice said the council of finance ministers "cannot depart from the rules laid down by the treaty or those which it set for itself in regulation no 1467/97 (which specifies the terms of the pact)".

According to William Robinson, a partner at London law firm Freshfields Bruckhaus Deringer, "this is a brave decision".

"The council tried to sidestep the process and came up with a political compromise but the court said they must follow the rules of the game," Mr Robinson said.

France's Finance Minister Nicolas Sarkozy, however, was upbeat about the court's ruling, saying that it will boost his "commitment to reduce the deficits".

His German counterpart, Hans Eichel, preferred to focus on what the decision means for the future behaviour of eurozone finance ministers.

"The court has confirmed that the council has room for manoeuvre when it applies the Stability and Growth Pact," he said.

Power tussle

In November 2003 the EU finance ministers, led by the German and French representatives, voted to suspend action against Germany and France, arguing that the 3% rule was too severe.

EU flags

In an effective fight for power between the European Commission and the finance ministers - who come from the member states - the commission quickly followed with its lawsuit.

And while the commission has since agreed that the 3% rule does in fact need to be relaxed, it has continued to object to the intervention of the finance ministers and the law suit remained.

The 3% rule and the subsequent penalties were formulated to prevent bad budgetary policies in one member state having an effect across the eurozone.

The pact has been controversial, with critics saying its focus on fighting inflation means it is ill-equipped to deal with slow growth.

But smaller countries, including the Netherlands, have insisted that all 12 eurozone members should stay in line.

And Portugal has worked strenuously to remove its own deficit.

Possible relaxation

Yet at the same time other eurozone nations, such as Italy and Greece, have been struggling with their deficits.

And six of the 10 new EU countries that are committed to joining the eurozone at some point also have excessive deficits - Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia.

All these factors could only have influenced June's comments by economic affairs commissioner Joaquin Almunia, who admitted that the Commission had been "too stringent" with the Stability and Growth Pact.

Calling for more flexibility, he said it was "probably necessary" to clarify the definitions of the pact's rulebook.

Nick Eisinger, an analyst at Fitch Ratings, is less charitable.

"The credibility of the Stability Pact is pretty much shot to pieces as there have been abuses left, right and centre," he said.

"Moreover, it is clear that there will always be a way out of fines."

The BBC's Stephen Sackur
"Some members of the Eurozone have been breaking their own rules"

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