European Central Bank (ECB) president Mr Wim Duisenberg said the European Commission's recent proposals to sharpen up the stability and growth pact are a "good starting point".
The EC proposed last week to extend the use of the EU's disciplinary procedure for countries with excessive deficits to high debt levels.
It also wants countries with healthy public finances, such as Britain, to have some leeway on their deficits, so as to be able to increase spending to boost jobs and growth.
Mr Duisenberg told the EU parliament's economic and monetary affairs committee the proposals are a "good starting point for rebuilding confidence in the budgetary policy framework".
He said although budgetary targets need to be set in nominal terms, assessment of fiscal policies need to take into account cyclical developments.
"Though the discussion surrounding this issue may, at times, appear confusing, it does not reflect a flaw in the Pact as some critics claim," Mr Duisenberg said.
The stability pact has been attacked by economists and politicians for failing to give countries enough room to counter the effects of the current economic slump with fiscal measures.
PA