Brussels gives in to Germany and France on euro

The European Commission has given France, Italy and Germany more time to honour a central economic pledge.

Faced with mounting evidence of stagnant growth, the Commission acknowledged yesterday that Germany and France, the powerhouse of the eurozone economy, are in danger of breaking strict rules laid down for membership of the single currency.

For months officials have insisted that European Union states can meet a 2004 target date for getting public finances into balance – an objective laid down in a set of economic policy guidelines. By yesterday that date was stretched to 2006.

The decision ends a rift between the eurozone countries. Both France and Italy have called for a more flexible interpretation of the rules, arguing that more spending could boost growth. Spain, the Netherlands and Finland have urged tight budgetary rules to prevent sloppy public finances.

Meanwhile, the Commission underlined its concern that big member states may be about to breach the binding rules of the so-called Growth and Stability Pact that say that countries' deficits must not exceed 3 per cent of gross domestic product.

A report from the Commission published yesterday said Germany's deficit might exceed the ceiling in 2002 and that France had "dangerously small" leeway.

Romano Prodi, the Commission president, acknowledged that both France and Germany were in danger of breaking the 3 per cent limit. Portugal, which exceeded that ceiling last year, hitting 4.1 per cent, may do the same again this year, he added.

Mr Prodi said four countries – Germany, France, Italy and Portugal – "are not only dangerously close to, if not already above, the threshold, but all of them will also fail to respect their commitment to reach a close-to-balance position in 2003-2004".

"By 2006 at the latest the objectives must be reached," Mr Prodi said.

The stability pact and the economic policy guidelines were designed to protect the credibility of the euro and keep EU interest rates low.