The European Commission has halted disciplinary action against Germany and France for exceeding EU member state borrowing limits.
The Commission accepted assurances from both countries that budget deficits in 2005 would come in below the EU cap of 3 per cent of GDP for the first time in four years.
The move is expected to help defuse tensions that came to a head when EU finance ministers blocked disciplinary measures against Berlin and Paris in November 2003, prompting a legal challenge from Brussels.
While the European Court of Justice annulled the ministers' decision, the Commission has decided not to pick another fight at a time when it is trying to build a consensus on how to revamp the Stability and Growth Pact.
"In the light of the court judgment and given the action taken by France and Germany it would appear that no further steps are required at this point," European Monetary Affairs Commissioner Mr Joaquin Almunia said in a statement.
But the EU executive Commission stressed it would monitor budgetary developments in Germany and France and would not hesitate to act if the regulations were broken again.
"The budgetary situation remains vulnerable in the two countries. Should the corrective measures fail, the Commission would have to recommend to the council [of ministers] to enhance budgetary surveillance," Mr Almunia said.
Germany has unveiled budget cuts that it predicts will bring its 2005 deficit down to 2.9 per cent of gross domestic product from 3.9 per cent in 2004, the Commission said.
In France, the government is projecting the deficit will fall to 3.0 per cent of GDP from 3.7 per cent in 2004, it added.
While Germany and France are expected to welcome the Commission's move, the EU executive also faces critics.
"The Commission is buckling under the pressure from Germany and France. This is a ghastly signal for confidence in the euro," said Mr Alexander Radwan, economic spokesman for the European People's Party in the European Parliament.