The row over budget deficits endorses the fears of the EU's smaller states that France and Germany appear to believe their sheer size and economic power allow them to interpret EU rules their way, writes Denis Staunton in Brussels
The Minister for Finance, Mr McCreevy, sought yesterday to play down the dispute between EU finance ministers and the European Commission as a debate about substance and procedure. He claimed that, far from undermining the Stability and Growth Pact, yesterday's decision upheld the rule that euro zone countries must keep their budget deficits below 3 per cent of GDP.
"Germany and France have agreed to come within the 3 per cent and everyone agrees about that. I honestly think people shouldn't get too hung up about the procedure," he said. Unfortunately for Mr McCreevy and his fellow finance ministers, however, the European Central Bank (ECB) and the European Commission are extremely hung up on procedure.
In unusually strong statements yesterday, the two bodies charged with protecting Europe's single currency declared that strict adherence to the rules is the only way to preserve the euro's integrity and to ensure fair play within the EU.
"Only a rule-based system can guarantee that commitments are in force and that all member-states are treated equally," the commission said.
Yesterday's dispute is all the more serious in that it comes just two weeks before EU leaders are due to agree the final text of a new constitutional treaty. Belgium's Finance Minister, Mr Didier Reynders, suggested yesterday that, by blocking the strict application of the pact, France and Germany were offering ammunition to opponents of the new treaty.
"It will be rather difficult to explain that we absolutely want to respect the rules of this new treaty at the same time as we are seeking blocking minorities to avoid applying the current treaty," he said.
France and Germany argue that yesterday's compromise represented the triumph of economic common sense over the rigid application of budget rules designed at a time when the European economy was more buoyant than it is now. They say that, with growth sluggish in Europe's two biggest economies, now is not the time to apply the thumbscrews in a way that could wreck the euro zone's fragile recovery.
The economic argument is a persuasive one and many economists believe that the pact's rules ought to be more flexible. Yesterday's dispute was not about economic judgment, however, but about politics.
The commission shares the analysis that too much pressure to cut budgets could damage the euro zone economy. This is why the Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, agreed to give France and Germany an extra year to reduce their deficits.
As Mr McCreevy pointed out, both sides in the argument agreed on the substance of what action was necessary. The problem arose from the refusal of France - and more particularly, Germany - to submit to the rigour of formal monitoring from Brussels.
The government in Berlin was unwilling to undergo what could be humiliating and politically damaging scrutiny that could continue until close to the next German federal elections in 2006.
Berlin was also reluctant to make binding commitments that would prevent it from relaxing budget discipline close to the election without risking economic sanctions under the pact.
The row over the Stability and Growth Pact comes as a growing number of EU diplomats predict that next month's summit will fail to reach agreement on the constitutional treaty, leaving it up to next year's Irish presidency to complete negotiations.
A senior British government figure said this week that, although London wanted a new treaty, it could happily live without one and was willing to veto any agreement that crossed Britain's "red lines" on tax, social security and defence.
"It is highly desirable but not absolutely necessary to have a treaty. We hope to get agreement in Brussels but we won't know until we are there," the senior cabinet minister said.
The statement followed news last week that Britain has promised to support Spain and Portugal in their resistance to changing the complicated system of weighted votes in the Council of Ministers agreed at Nice. France and Germany are leading moves to replace the system with a "double majority" that would allow EU legislation to be approved by a majority of member-states comprising at least 60 per cent of the EU's population.
Senior German government figures have made it clear that achieving the "double majority" is Berlin's absolute priority in the negotiations.
Germany believes that a more accurate reflection of population in voting weight is essential in an enlarged EU made up of 19 small states and six large countries.
Some officials suggest that, if small countries are to achieve their demand of being allowed to continue to nominate a member of the Commission, they may have to agree to the big countries nominating two each.
Such a shift of power from small to large states would be controversial at the best of times. After yesterday's events, citizens in the EU's smaller states may fear that France and Germany believe that their sheer size and economic power should allow them to interpret EU rules their own way.
The German Chancellor, Mr Gerhard Schröder, and the French President, Mr Jacques Chirac, have characterised many of their recent European initiatives as grand gestures made in the broader EU interest. After yesterday's events in Brussels, few outside France and Germany - apart, perhaps, from Mr McCreevy - will be inclined to believe them.