EU finance ministers have drawn back from substantial reform of the Stability and Growth Pact as the European Commission warned France that it could face disciplinary action for breaching the pact's budget rules

At a meeting in Brussels yesterday, the ministers rejected a Commission proposal to allow countries with low public debt to run higher budget deficits than the pact allows.

Under the pact's rules, euro-zone governments must keep their budget deficits below 3 per cent of GDP and countries whose budget positions are not close to balance or in surplus must improve their position by 0.5 per cent per year.

The Commission wanted to create an explicit link between public debt levels and the level of budget deficit permissible but the ministers agreed on a vaguer statement: "In assessing compliance with the pact's close-to-balance requirement, analysis will be country-specific and take account of long-term sustainability and safety margins in respect of the 3 per cent deficit reference value," they said.

The Minister for Finance, Mr McCreevy, expressed disappointment at the finance ministers' decision, which he described as "tinkering at the edges" of the pact. He said the changes agreed yesterday would not help him to spend more on infrastructure while remaining within the pact's rules. "It won't make it any better," he said.

Yesterday's meeting followed France's announcement on Thursday evening that its budget deficit this year would reach 3.4 per cent of GDP - 0.4 per cent more than the pact allows. The French finance minister, Mr Frederic Mer, insisted that his government had no option but to exceed the deficit limit and promised that the deficit would be below 3 per cent in 2004.

Mr McCreevy said France was the third euro-zone member-state, after Germany and Portugal, to breach the pact's budget rules and that Italy was also expected to exceed the 3 per cent limit this year. "Even though we are breaking the rules, we are not throwing out the rule book."

Mr McCreevy expressed support for Germany and France, suggesting that abiding by the rules could do more harm than good.

"What more can Germany do? If they could, should it be done? Germany and France are motors of the European economy," he said. He insisted the pact was not damaging the Irish economy and promised to abide by its rules in drawing up future budgets. He warned last month that failure to reform the pact could jeopardise major infrastructural projects planned by the Government.

Britain, Germany and France yesterday presented a joint communication on economic reform for consideration by EU leaders at a summit in Brussels later this month. But the three countries dropped a section of the document calling for reform of the pact after complaints from other member-states. Sources close to yesterday's meeting said the ministers failed to agree on reforming the pact as countries with high public debt want to avail of a flexibility clause too.