The European Court of Justice ruled against a decision by the EU council of finance ministers that had suspended excessive deficit measures launched against France and Germany.
Is the ruling a red flag for the German finance minister?
A November 2003 decision by the council, ignoring a previous European Commission recommendation to punish the two countries for failing to reduce public deficits, had driven a wedge into the EU's Stability and Growth Pact. It also set up a precedent whereby the Commission sought legal action against EU governments for violating their own accepted guidelines.
"The council cannot depart from the rules laid down by the treaty or those which it set for itself in Regulation No. 1467/97," the court said in its statement Tuesday annulling the council's conclusions from Nov. 25.
European commissioners had advised that more stringent budgetary measures be brought against France and Germany after their public deficits repeatedly breached the stability pact's ceiling of three percent of gross domestic product.
But a council of EU finance ministers decided not to press for a strict application of rules, ironically designed at Germany's behest to underpin the EU's single currency.
A clutch of member states that have worked hard to remedy their own finances -- Austria, the Netherlands, Finland and Spain -- had voted against the council's decision, arguing that letting Berlin and Paris off the hook would sound the death knell for the rules.
Dutch Finance Minister Gerrit Zalm, one the fiercest advocates of budgetary discipline, said after he and fellow ministers were overruled: "The pact is not dead but it's in the refrigerator."
Victory for Commission
The court's verdict represents a tactical victory for the European Commission, the EU's Brussels-based executive office, which had feared that its authority would be undermined if the council of ministers was allowed to bypass the Commission and set its own agenda without reprimands.
The court in Luxembourg noted that "responsibility for making the member states observe budgetary discipline lies essentially" with the council of ministers from the EU governments. But it said once a disciplinary procedure has been implemented and the ministers have adopted recommendations for a country to correct its deficit problem, the ministers "cannot modify them without being prompted again by the Commission, which has a right of initiative."
Only a reprieve for Germany a France
EU finance ministers had granted Germany and France, which together make up roughly half of the euro zone's economic output, a reprieve from sanctions in return for promises to bring their budgets back in line with the Stability Pact by 2005, a condition both accepted.
German and French ministers had argued that additional budget cuts or tax hikes as proposed by the Commission would only worsen their dire economic straits and that the idea behind the Stability Pact should not be to cripple a member state's economy.
Following the court's ruling, excessive deficit procedures may now be restarted against Germany and France but they need not fear fines, the ultimate sanction in the budget disciplinary procedure which may now have to be restarted.
The Stability Pact itself has repeatedly come under question and even in the Commission the rule have met with criticism. Later this year the EU executive is expected to propose reforms to make the guidelines more flexible.