Germany will not be fined for breaking the rules of the Stability and Growth Pact this year, provided next year's public-sector deficit stays within 3 per cent of gross domestic product (GDP).
Mr Pedro Solbes, the EU monetary affairs commissioner, said yesterday that there would be "no debate" about penalties for a once-off breach of the pact. A Commission spokesman said Germany would only be fined for repeated breaches of the 3 per cent ceiling.
Mr Hans Eichel, the German finance minister, said Germany would accept it broke the rules of the Stability and Growth Pact to avoid destabilising the euro.
He told Mr Solbes at a meeting in Berlin yesterday that Germany would work with Brussels on measures to lower the public-sector deficit and to balance the budget by 2006.
The two men met just days after Mr Eichel admitted that Germany's public-sector deficit would rise above 3 per cent this year, breaching the pact devised by Germany to protect the stability of the euro.
Mr Solbes said he was optimistic that the re-elected government's plans for tax hikes and spending cuts would curb the deficit.
"The coalition agreement gives a clear sign that decisive steps are being planned by the German government to control the deficit and bring it below the 3 per cent threshold next year," said Mr Solbes yesterday.
However, the proposals have yet to be approved by parliament and risk being rejected by the conservative-controlled upper house, the Bundesrat.
Berlin has faced a budgetary crisis for months but matters came to a head after a huge shortfall in September tax revenue that left Mr Eichel facing a €14 billion hole in his finances next year. He has slashed his forecast of GDP growth to less than 1 per cent this year and 1.5 per cent next year.
Yesterday's announcement means Berlin will be saved from fines it can ill afford. Under EU rules, fines for breaching the terms of the stability pact can in theory total up to 0.5 per cent of GDP.
Mr Eichel is confident he can keep the budget deficit under 3 per cent of GDP next year. Earlier this week, Germany's six leading economic institutes said the deficit was likely to fall to 1.9 per cent of GDP next year.
