Euro-zone finance ministers have agreed to loosen budget rules to allow governments to run higher deficits in a broad range of circumstances.
The breakthrough came after almost 10 hours of talks in Brussels within the Eurogroup of euro-zone finance ministers. They agreed on a formulation that would allow Germany to use the ongoing cost of its reunification 15 years ago as a justification for breaching the limit on budget deficits of 3 per cent of GDP.
A resolution to be approved by EU leaders at a summit in Brussels tomorrow proposes that "special consideration will be given to budgetary efforts towards increasing or maintaining at a high level financial contributions to fostering international solidarity and to achieving European policy goals".
Officials said last night that ministers from all 25 member-states agreed to add costs linked to "European unification" to the list of mitigating circumstances.
This would mean that Germany could plead both the cost of reunification and the country's net contribution to the EU budget as justification for exceeding the budget deficit limit.
Any breach of the deficit limit would have to be temporary and limited to 0.5 per cent of GDP.
Germany, France and Italy have led calls for greater flexibility and for certain categories of spending to be defined as "relevant factors" that could justify breaching the budget deficit limit of 3 per cent of GDP.
According to the agreement, some forms of expenditure, including development aid, education, innovation, research and development, boosting employment, debt reduction and pension reform, could be presented as mitigating factors in the event of an excessive deficit.
The reform deal would also oblige EU finance ministers to give due consideration to "any other factors which, in the opinion of the member state concerned, are relevant" to evaluating an excessive deficit.
Neither the Minister for Finance, Brian Cowen, nor the Minister of State at the Department of Finance, Tom Parlon attended yesterday's meeting. Ireland was instead represented by senior officials from the Department of Finance.
At present, all euro-zone governments are required to pursue a medium-term budget objective of close to balance or in surplus. The new rules would, however, allow member states such as Ireland, with low public debt levels and high economic growth, to run a budget deficit of up to 1 per cent of GDP in order to increase public investment.
The Government estimates that such a change would release approximately €1.5 billion each year for investment in improved infrastructure.
Among the most controversial changes is a modification of the rules governing how member states which persistently breach the budget rules should be punished.
The draft resolution would allow finance ministers to suspend the triggering of economic sanctions indefinitely, a proposal that has been fiercely resisted by hardliners such as Austria and the Netherlands.
Luxembourg's EU Presidency insists that the changes agreed last night are not meant to make the Stability and Growth Pact more flexible but to render it more effective.
Another change would require governments to involve national parliaments in the implementation of stability programmes agreed at EU level.
The European Central Bank (ECB) has argued strongly against any loosening of the EU's budget rules, warning that interest rates could rise if fiscal discipline suffers as a result of the changes.
Last night's deal represents an important victory for Germany and France, which have argued that the budget rules are too rigid and that they hamper economic growth.