The European Commission on Friday watered down its hardline stability and growth pact.
Bowing to the inevitable -- following persistent breaches of the rules by the eurozone's two most powerful members, Germany and France -- Brussels announced plans that would make the pact less rigid.
The UK, which has argued that the inflexibility of the pact makes governments less able to cope with recessions, welcomed the proposals as a "step in the right direction" but said there was still more to do.
Although the proposals announced yesterday were designed to meet criticism from existing eurozone members, the impact will be to bring the management of fiscal policy in the 12-nation single currency area closer to that in the UK.
British Finance Minister Gordon Brown had been sharply critical of rules designed in the mid-90s that were introduced to prevent members of the eurozone from spending beyond their means and putting pressure on the single currency. Brown called for reform of the pact, under which governments are supposed to keep budget deficits below 3 percent of GDP and work toward balancing the books.
Countries that breach the rules are liable to fines, but the pact in effect broke down when Paris and Berlin, facing rising unemployment and stagnant growth, refused to tighten the economic screw by raising taxes or cutting spending.
Both escaped disciplinary action late last year, undermining the credibility of the pact and forcing the commission into the rethink that produced yesterday's changes. These include paying greater attention to economic developments when setting deadlines for budget cuts, taking account of whether a country's debts are sustainable, and making greater allowances for the state of the economy. Finance ministers are due to discuss the proposals at the end of next week, but a final decision may not be reached until next year.
A UK Treasury spokesman said Britain was pleased to see more account being taken of debt sustainability and the role of investment, but added that budget deficits should be assessed across the economic cycle rather than on a year-by-year basis. Reform of the pact is not one of the Treasury's five tests for entry into the euro, but Brown's belief that the pact stifles growth has been an obstacle to UK membership.
European Commission President Romano Prodi put a brave face on the climb-down.
"This pact continues to be indispensable for the stability of the euro and for the health of the European economy. However ... the union's economic agenda has moved forward since the creation of the euro and efforts to maximize our growth potential are now at the center of our economic policy consideration. The objective is to strike a better synergy between growth and fiscal discipline," Prodi said.
He added later: "The proposals present a credible compromise between economic soundness and political realism ... between sustainable growth and sustainable public finances."
However, Pervenche Beres, chairwoman of the European parliament's economic and monetary affairs committee, criticized the changes.
"I wonder whether this sort of short-term reaction to the current difficulties faced by some member states is what we need," she said.
Gabriel Stein, an economist with Lombard Street Research in London, said the proposals made sense, but added that the reformed pact would only work if countries found it in their interests to comply.
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