Germany, Europe's biggest economy, finally admitted today it would breach the deficit limits it insisted on establishing to protect monetary union, posing the biggest challenge yet to EU budget discipline.
After months of denial, German Finance Minister Mr Hans Eichel said for the first time what many have long suspected - that Berlin will probably be unable to keep its 2002 deficit below the EU limit of three per cent of gross domestic product (GDP).
The European Commission was quick to react, saying it would have to start disciplinary action if national data or Commission forecasts confirmed its deficit overshot European Union limits.
Moreover, the EU's Stability and Growth Pact, which enshrines EU budget rules, has a get-out clause for countries whose deficits exceed EU limits due to exceptional circumstances that could work in Berlin's favour.
Floods that devastated Germany's eastern regions in August added to the government's budget woes and the Commission has already said it will take that into account.