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EC calls truce in deficit battle

The European Commission (EC) has called a truce in its battle with France and Germany over breaching deficit limits.

The move came after France and Germany vowed to run their budget deficits below the EU cap in 2005 - for the first time in four years. But, the EC did warn the two were under close scrutiny and it would act if their fiscal situations deteriorated. Under EU rules, member countries must keep their deficits below 3%. France and Germany will breach that this year. It will be the third year in a row that the two countries have broken the European Union's Stability and Growth Pact rules.

The eurozone's two biggest economies left the pact in tatters in November 2003 when they persuaded fellow EU members to put the threat of penalties for deficit breaches on hold.

The commission then took the pair to the European Court of Human Justice - which ruled EU countries could not put the pact "in abeyance", and confirmed the EC's right to launch "excessive debt procedures". After announcing its decision to erase France and Germany from its list of deficit rule breakers, the EU said that the time lag created by the ruling meant that 2005 should be the target year for the pair to bring their budget's below 3%. "The commission concludes that the two countries appear to be on track to correct their excessive deficits by 2005," it said in a statement. The EU expects the German deficit to fall to fall to 2.9% of GDP next year from 3.9% this year, while France's is forecast to drop to 3% from an expected 3.7% this year. The forecasts are based on EC predictions of GDP growth of 1.5% in Germany next year and 2.2% in France.

Berlin welcomed the decision, with finance minister Hans Eichel saying it showed that the EC recognised Germany's fiscal policy was "on the right track even amid very difficult economic conditions". However Paris was more subdued, with finance minister Herve Gaymard telling parliament: "We must continue along this path of saving money." However, the move still had its critics, with the European People's Party (EPP) attacking the EC for backing down from punitive action. "The Commission is buckling under the pressure from Germany and France, " EPP spokesman Alexander Radwan said. "The scary fact is that budget sinners, despite having repeatedly exceeded the 3% deficit limit, do not have to fear any sanctions." Despite the commission delivering its decision on the two biggest eurozone economies, it refused to comment on similar action against Greece which has also broken the 3% deficit ceiling. Monetary Affairs Commissioner Joaquin Almunia said that it was a matter for next week.