Europe's member states yesterday defended their right to run big budget deficits - and to override European Commission attempts to bring them into line.

In a landmark legal hearing in Luxembourg, EU members argued they were in charge when it came to running their economic and budget policies. The commission argued the members acted illegally when they suspended the sanctions mechanism of the EU's stability and growth pact last November.

Yesterday's battle at the European Court of Justice had its roots in the finance minsters' council at which France and Germany engineered the suspension of the pact's rules to avoid fines over their budget deficits. Instead finance ministers agreed that France and Germany would promise to make greater efforts to tackle their deficits.

Mr Michel Petite, for the commission, told the court the Ecofin council acted illegally. "We have a situation which is a departure from the rule of law," he said. "It is indiscriminate and precarious - a situation which depends entirely on the goodwill of the member state concerned."

But Mr Jean-Claude Piris, for the council, argued there was no obligation under EU law for ministers to apply the sanctions procedure, and the pact was specifically designed to put politicians - not the commission - in charge.

"The authors of the treaty did not put in place a centralised economic union to go alongside monetary union," he told the court. Although 12 EU members had adopted the euro, he said, "each of these states remains largely responsible for its own economic, fiscal and budgetary policy".

The court will rule by summer but it seems likely the stability pact crisis will be resolved ultimately not by the courts but by a political rewrite of the text next year.

Meanwhile, the commission yesterday tried to maintain budgetary discipline by proposing to warn Italy about its rising deficit, with lesser warnings to Britain and the Netherlands.