The European Commission faces humiliation tomorrow after it emerged it is set to lose a key vote on fiscal policy which would have forced the UK to cut £10bn from public spending.
Britain and Italy are to join together to block a call to censure Germany and Portugal for their soaring budget deficits at a meeting of European economic and finance ministers (Ecofin).
The UK, which believes the Commission has failed to take account of the need for countries to borrow during the current economic slowdown, was further boosted by news that the International Monetary Fund had thrown its weight behind Germany.
Under EU rules, two large countries and one smaller nation are enough to vote down a Commission proposal.
Gordon Brown, the Chancellor, yesterday said that the EU's stability and growth pact, which can fine member states for running budget deficits, was being interpreted too narrowly.
Speaking at the fringes of the meeting of the Group of Seven finance ministers in Ottawa, Canada, Mr Brown said there would be "further discussions" ahead of tomorrow's Ecofin.
"Increasingly, there's the view that the stability pact has to be interpreted to take account of the economic cycle, and some would argue, to take account of the needs for investment," he said.
"We certainly could not go along with a recommendation that might lead us to have to cut public expenditure by £10bn. When the needs for the health service, education, transport and policing are very clear."
Mr Brown believes that the pact should allow governments to borrow for investment during a downturn in the economic cycle – otherwise known as using the automatic stabilisers.
In its submission to the G7, the IMF said European countries should not be forced to cut spending or raise taxes just to meet the terms of the pact.'
"With regard to fiscal policy, the automatic stabilisers should be allowed to operate," it said.
At the G7 meeting, senior European politicians appeared to be on the defensive over the interpretation of the pact and over tomorrow's vote.
Pedro Solbes, the EU's monetary affairs commissioner, said: "The responsibility of the Commission is to prepare the draft recommendation and it is up to Ecofin to decide."
Wim Duisenberg, the president of European Central Bank, said: "I fully support the Commission in its endeavours as guardian of the EU treaty and as guardian of the pact." EU member states must not run a deficit of more than 3 per cent of GDP and must also balance their budgets over the medium term. Countries inside the Euro can be fined while nations outside monetary union, such as the UK, could find it an obstacle to membership.Reuse content