Euro-zone finance ministers last night sought to overcome their differences over a reform of the Stability and Growth Pact aimed at easing the EU's budget rules without abandoning fiscal discipline.

A discussion paper circulated by Luxembourg's EU presidency, which The Irish Times has seen, suggests that governments could be allowed to breach the budget deficit limit of 3 per cent of GDP for a number of years if they were engaged in major structural reforms. "The principle could specify that only major [ pension and healthcare] reforms with direct long-term cost-saving effects... would be considered. The burden of proof would rest with the member-states," the document says.

France, Germany and Italy want certain expenditure, such as military expenditure, to be removed from the calculation of budget deficits, a proposal that most other countries oppose.

There appears to be broad agreement, however, that the definition of "exceptional circumstances" under which a country should be allowed to exceed the budget deficit limit should be relaxed. At present, an annual fall in real GDP of at least two percentage points is required.

The presidency document proposes a new definition. "A severe economic downturn would be defined in terms of a negative growth rate," it says.

The proposal would give governments more time to correct an excessive deficit, but all euro-zone countries would agree to consolidate budgets during economic upswings.

At present, the medium-term objective for all euro-zone countries is to achieve balanced or close-to-balanced budgets. The reform proposal would create country-specific budget goals, ranging between -1 and +0.5 per cent of GDP.

The use of sanctions against offending countries would be limited, with the council allowed some flexibility in its application.

"It should be reconfirmed that sanctions may (and will) be used as a measure of last resort; while stressing that the objective of the pact is not to punish member-states with excessive deficits or debt levels, but that the pact should be viewed as an instrument for lending peer-support to member-states with budgetary problems," the document says.

Economic and Monetary Affairs Commissioner Mr Joaquin Almunia expressed confidence that the differences could be overcome in time to agree a reform of the pact before EU leaders meet next month.