Euro stability pact rulebook in chaos after court ruling

Europe's highest court decided yesterday that EU finance ministers broke the law by allowing France and Germany to flout the euro's rules, but it failed to end uncertainty over who should police the rulebook.

Europe's highest court decided yesterday that EU finance ministers broke the law by allowing France and Germany to flout the euro's rules, but it failed to end uncertainty over who should police the rulebook.

The decision marks a symbolic victory for the European Commission which took the unusual step of taking EU finance ministers to court when they failed to back its measures against Paris and Berlin last year.

But the ruling in the European Court of Justice is unlikely to change the balance of power within the EU, because the court also said EU finance ministers could have used other procedures to block action against France and Germany while remaining within the law.

Months of tension over who should police the euro rulebook, the so-called stability and growth pact, came to a head last November over the economic record of France and Germany. Both were in clear breach of the main rule: that countries must observe a ceiling on their budget deficits of 3 per cent of gross domestic product.

Under the pact, a procedure must be followed under which member states could, ultimately, face massive fines for breaching the rules. Last November, EU finance ministers put aside the recommendations of the Commission and placed the procedures in abeyance. The Commission now knows that, in future, ministers will not be able to ignore its recommendations and take an alternative course of action.

Less welcome for the Commission was the finding that EU finance ministers can amend the Commission's recommendations, or send them back for consideration, blocking them indefinitely. That means that, were the Commission to recommend the same course of action again, it could still be frustrated by Paris and Berlin.

Diplomats pointed out that, without the backing of the member states, the Commission remained powerless in its battle to enforce the pact which underpins the 12-nation eurozone. The German Finance Minister, Hans Eichel, said the ruling from the Luxembourg court confirmed that ministers have "leeway to apply the rules". He added: "Finance ministers are and will remain the custodians of deficit procedures."

Jean-Claude Juncker, the Prime Minister and Finance Minister of Luxembourg, said: "The European Court has confirmed, against the legal advice of the Commission, that the finance ministers had the right to refuse to approve the recommendations of the European Commission." Mr Juncker, tipped to be chairman of the eurogroup countries, said he remained confident France and Germany would comply with their obligations and reduce their budget deficits.

The continuing uncertainty over the rules is likely to fuel calls for reform of the rulebook. Jose Manuel Barroso, who takes over as president of the Commission in November, told the European Parliament in Brussels that he was ready to "make the pact more credible without rewriting it".

France and Germany have been running budget deficits that exceed the 3 per cent limit since 2002. Ironically, the rules were designed at German insistence to protect the currency from government overspending that could fuel inflation. Labouring under the twin strains of reunification and a sustained economic slowdown, Germany began to breach the pact; unemployment soared and tax revenue slumped.