On Tuesday the European Court of Justice annulled a decision which had suspended disciplinary measures against France and Germany for running public deficits in excess of the limit of 3.0 per cent of output laid down in the Stability and Growth Pact.

The pact is intended to underpin the economic fundamentals and the credibility of the euro, and the court ruled that EU ministers could not deviate from the rules in the pact.

The move to suspend disciplinary action against Germany and France last year had dented the credibility of the 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.

"We welcome the
ruling by the European Court of Justice.
It affirms the legality
of the decision by the council of ministers
on 25 November 2003"


Joerg Mueller,
German Finance Ministry spokesman

The ruling was seen as 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 European Commission was not immediately available for comment.

German, French reaction

The German government welcomed a ruling by the European Court of Justice in Luxembourg regarding the EU's stability and growth pact, saying the judgment gave eurozone governments room for manoeuvre in interpreting the EU's strict set of budget rules.

"We welcome the ruling by the European Court of Justice. It affirms the legality of the decision by the council of ministers on 25 November 2003," finance ministry spokesman Joerg Mueller said in a statement.

"There is no automatism in the deficit procedures. In fact, the council has room to make decisions and the council made use of that room for manoeuvre."

France said that it was for the Dutch presidency of the EU to react to the ruling.