The Government appears to be close to a settlement of its row with the European Commission and other finance ministries over budgetary policy.

The Minister for Finance, Mr McCreevy, met the new director general of economic affairs, Mr Klaus Regling, for more than an hour yesterday in what a spokeswoman described as a "very amiable meeting and a useful exchange of views".

Mr Regling also met top Department of Finance officials as well as the most senior figures from the Taoiseach's Department and the governor of the Central Bank. The meetings followed initial discussion among officials last week.

Irish officials are hoping that the downturn in the economy and plummeting tax receipts will persuade the Commission that last year's Budget was appropriate, even if only in hindsight.

EU heads of state had backed a Commission recommendation requiring the Government to take measures this year to reverse the effects of the spending increases and tax cuts in the Budget. But none have yet been taken. However, there is some optimism that if the Commission focuses on a cyclically adjusted budget surplus, which would naturally be turning down along with the economy, then a way out can be found.

It may have also taken on board criticisms, made by Prof John Fitzgerald of the Economic and Social Research Institute, among others, that a focus on consumer prices in the Irish context was inappropriate.

Mr Regling and his officials have to report back to the Economic and Financial Committee, made up of top finance and central bank officials from across Europe. The issues will then be passed on to the finance ministers for their views, probably at a meeting in mid-November.

The Commission officials were interested in the extent of the downturn here as well as in the labour markets and the outlook for social partnership.

However, nothing can be guaranteed and other finance ministers will have to be persuaded of the merits of the arguments. Belgian minister Mr Didier Reynders, who was one of the most vocal critics of Ireland last year, appears to be on a confrontational path with the Italians this year.

Mr Reynders, the chairman of the Euro group of euro zone finance ministers, has asked Italy for details of its budget plan to see whether it could escape a rebuke over deficit overshoot.

"I have asked the government in Rome for more information.

"I'd like to find out whether a warning could be avoided," Mr Reynders told German weekly magazine Capital in an interview.

Meanwhile, growing evidence of the economic slowdown emerged yesterday as non-EU exports fell in July, according to the latest data from the Central Statistics Office.

On a seasonally adjusted basis Irish exports to non-EU countries fell to £2.17 billion in July 2001 from £2.48 billion in June. Imports rose slightly from £1.24 billion to £1.28 billion in July.

However, the figures for the first seven months of the year were still strong on the back of exceptionally strong growth at the beginning of the year.