Euro zone finance ministers have freed themselves from the constraints of EU budget rules by suspending disciplinary action against Germany and France in defiance of an angry European Commission.
Berlin and Paris will be merely asked for a political commitment to cutting deficits that are set to break EU limits for the third year in a row in 2004, rather than go through a disciplinary process and possible fine.
At a time of nascent economic recovery, both will also be urged to cut deficits by less than the Commission recommended, under an accord struck after nearly 10 hours of talks and which will be put to a formal vote by EU ministers later on Tuesday.
Italian Finance Minister Giulio Tremonti said the deal was in line with the spirit and letter of EU budget rules but Spain, The Netherlands, Finland, and Austria did not back it.
The EU executive said ministers were entering uncharted territory that would make it harder to enforce the budget discipline rules that were drawn up before monetary union and were designed to underpin the euro.
"The Commission deeply regrets that these proposals are not following the spirit and the rules of the (EU) treaty and the Stability and Growth Pact [on budget discipline]," European Monetary Affairs Commissioner Mr Pedro Solbes said.
The EU executive, which is responsible for enforcing the pact, declined to spell out its next move but dropped hints that it may mount a legal challenge. "The Commission, while continuing to apply the treaty, will reserve the right to examine the implication of these conclusions, if they are finally accepted, and decide on possible subsequent actions," Mr Solbes added.
EU diplomats said European Central Bank chief Mr Jean-Claude Trichet had spoken out against any watering down of EU budget discipline, which he had urged on euro zone finance ministers.
So far, financial markets have shown little worry over the gradual loosening of EU budget constraints, with the euro last week hitting record highs against the dollar.
However, prior to the deal some finance ministers had voiced concern that a split among the 12 members of the euro zone could send the wrong signals to financial markets, leading to higher interest rates.