Judgment day for France and Germany

European Union finance ministers will today decide on what action to take against France and Germany over their breaches of the Stability and Growth Pact, which sets strict budget limits on euro-zone countries.

Euro-zone finance ministers were meeting in Brussels last night in advance of today's meeting, amid signs of a possible compromise between the European Commission and the two errant governments.

The Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, has outlined concrete steps that Paris and Berlin should take to reduce their budget deficits.

Last week, he told Berlin to lower its structural deficit, adjusted for cyclical factors, by 0.8 percentage points of gross domestic product by 2004, meaning that Germany's finance minister, Mr Hans Eichel, would have to make a further €4 billion in budget cuts.

If Germany heeds Brussels' demand, it will be given until 2005 to bring its nominal deficit back down below the threshold of 3 per cent of GDP. If Germany resists, it could face punitive measures, including fines, under the terms of the pact.

A spokesman for Mr Solbes said yesterday that the Commission was open to "sensible discussions" about the details of plans to reduce the budget deficits, as long as such plans made economic sense. The Italian Presidency is understood to be working on a compromise proposal that would give France and Germany two years to make the deficit cuts the Commission has demanded in one.

Most finance ministers are reluctant to stage a showdown, with Austria and the Netherlands alone in demanding a tough line against Paris and Berlin. Many economists believe that the EU's two biggest economies cannot afford to abide too rigidly by the pact's rules at a time when they need to boost growth.

The Commission and its supporters are anxious, however, that failure to trigger the next stage in proceedings against Paris and Berlin could render the pact toothless.

They are also conscious of accusations that EU budget rules are applied more rigorously to small member-states than to larger ones.

The Minister for Finance, Mr McCreevy, has shown sympathy for the predicament faced by France and Germany, and the Tánaiste, Ms Harney, said at the weekend that it would be wrong to apply the rules too rigidly.

The Government would like a more flexible interpretation of the pact that would facilitate investment in infrastructure but, although most EU finance ministers are unhappy with the rules as they stand, they are unable to agree about how they should be changed.