The European Union's highest court today annulled a controversial decision by the bloc's finance ministers to suspend budget disciplinary action against Germany and France last year.
The move had dented credibility of the Stability and Growth Pact on budget discipline and was challenged by the European Commission, the guardian of a pact that underpins the euro.
The European Court of Justice said ministers had the right to change Commission recommendations on budget policy but added that they failed to respect the rules when they suspended disciplinary action against Berlin and Paris, which are expected to break the EU deficit cap for the third year running in 2004.
"The court annuls the conclusions adopted by the Council in which the Council held the excessive deficit procedures in abeyance and modified the recommendations previously made by it to each of those member states for correction of their excessive deficit," the European Court of Justice said in a press release.
The ruling was seen strengthening the hand of the Commission, which forecasts that six of the euro zone's dozen member states could run 2004 deficits above the EU cap. However, there was little immediate reaction in financial markets.
The Netherlands, which currently holds the rotating EU presidency said it was good that there was now clarity over the disciplinary procedure and said it would hold a news conference at 11 a.m. Irish time.
"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," said Mr William Robinson, partner at Freshfields Bruckhaus Deringer in London, where he is a member of the EU group dealing with dispute resolution.
"This is a brave decision that upholds the rule of (procedural) law. The Council (of ministers) will be horrified, but the Court has simply held them to their procedural bargain."
Excessive deficit procedures may now be restarted against Germany and France but analysts said they need not fear fines, the ultimate sanction in the budget disciplinary procedure.
"The credibility of the Stability Pact is pretty much shot to pieces as there have been abuses left, right and centre. Moreover, it is clear that there will always be a way out of fines," Mr Nick Eisinger, director in Fitch's sovereign ratings group, told Reuters in a telephone interview.
Mr Anthony Thomas, European economist at Dresdner Kleinwort Wasserstein desribed the decision as a "very hollow victory" for the commission and is highly unlikely to result in the Stability Pact being any more effective in the future than it has been in the past.
In particular, it is highly unlikely to deter any member state from overspending nor does it increase the probability of a country being fined under the excessive deficit procedure. Mr Thomas concluded that the probability of a fine for breaking the pact is still negligible.