The European Court of Justice has annulled a decision by EU finance ministers to suspend disciplinary action against France and Germany for breaching the Stability and Growth Pact. Denis Staunton reports from Brussels

The court ruled that the ministers were entitled to reject a European Commission recommendation last November on action to be taken against Berlin and Paris but that they broke the rules by suspending the pact.

The judgment followed an appeal by the Commission against November's decision, which the EU executive claimed would undermine the authority of euro zone budget rules. The Commission welcomed yesterday's decision, adding that it confirmed the essential role of the Stability and Growth Pact rules in the EU budgetary surveillance process.

"In particular, the court ruling confirms the Commission's view as to the respective roles of the Commission and the Council in the application of the Stability and Growth Pact making thereby budgetary policy coordination more transparent and more predictable in the future. The Commission will study carefully the full decision of the court before making more detailed comments or proceeding in any other action," the Commission said in a statement.

EU finance ministers said they took note of the court's decision and would take it into account when they review the implementation of the pact later this year.

"The Council welcomes the clarification rendered on the interpretation of both the provisions of the Treaty on the excessive deficit procedure and the Stability and Growth Pact, clarifying the respective roles of the Commission and the Council The Council notes that France and Germany have undertaken firm commitments to reduce the budget deficit as set out in the Conclusions of 25 November, have taken steps to implement those commitments and expects them to remain fully engaged to fulfilling the commitments set out therein," the ministers said in a joint statement.

A spokesman for the Minister for Finance, Mr McCreevy, said that the Government shared the sentiments expressed in the joint statement.

France and Germany are expected to breach the euro zone's budget deficit limit of 3 per cent of GDP for the third successive year in 2004. In suspending the Stability and Growth Pact's excessive deficit procedure in November, the finance ministers warned Paris and Berlin that they could reactivate it if the two countries failed to take steps to reduce their deficits next year.

The Dutch finance Minister, Mr Gerrit Zalm, whose country holds the EU Presidency, said the finance ministers would look in the autumn at ways of strengthening the implementation of the budget rules. Formerly a harsh critic of the lenient approach adopted towards France and Germany, Mr Zalm yesterday called for calm.

"The first thing to increase credibility is to stop quarrelling and to get a common approach for the future, not looking too much into the past. Nobody wants a crisis and if nobody wants a crisis there won't be one," he said.

Germany's finance ministry welcomed the court ruling, saying it had confirmed that finance ministers do not have to follow Commission recommendations when disciplining governments.

"On the central issue the court has confirmed the legality of the Council's decision of November 25th, 2003," a ministry spokesman said. France's finance minister, Mr Nicholas Sarkozy, also welcomed the decision.

"This decision boosts me in my commitment to reduce the deficits, which is in line with France's European commitments," he said.

Austria's Mr Karl-Heinz Grasser, one of the fiercest critics of last November's decision, said that the Commission should now set France and Germany new deadlines to bring their finances under control.

"The Commission can do nothing other than declare Germany and France in default. The Commission should set them a new deadline for getting back under 3 per cent and tell them what measures to take," he said.