Mr Romano Prodi, President of the European Commission, has warned that Germany will face stiff fines if it continues to breach the Stability and Growth Pact.
Mr Prodi paid a flying visit to Chancellor Gerhard Schröder in Berlin yesterday, but the smiles during a walk through the streets of Berlin could not disguise Mr Prodi's concerns over Germany's ballooning budget deficit.
"We can not abolish or suspend the pact but we can interpret it with a certain flexibility," said Mr Prodi.
Last year, Germany breached the 3 per cent of gross domestic product (GDP) deficit ceiling agreed to protect the euro. It is on course to do so again this year and, quite possibly, next year.
Brussels has expressed concern about Berlin's plans to borrow an additional €5 billion next year to finance extra tax cuts in the hope of stimulating the flagging German economy.
Mr Schröder calls it a one-off measure and reminds his critics that the pact demands growth as well as stability. He says it is "possible and necessary" under the pact to introduce measures to stimulate economic growth.
"We want to protect this stability pact, as long as there are no new instruments, but interpret it flexibly," said Mr Schröder.
He added that the EU was not planning to "punish Germany for missing the targets" of the pact.
He was responding to what he called an "inaccurate report" from earlier in the day in which Mr Prodi said: "You cannot have a stability pact 'a la carte'."
However, Mr Prodi's spokesman confirmed the main points of the president's remarks. "We cannot have a situation where member-states pick and choose what they want from the pact," he said, speaking to The Irish Times. "It is a far-from-perfect tool but it needs to be respected because, at the moment, we have nothing else."
He confirmed that Berlin would be fined if it breached the terms of the pact next year.
Mr Prodi also invited Mr Schröder to Italy for the Verona Music Festival. Mr Schröder, who cancelled his Italian holiday because of the anti-German slurs from Italian government, accepted the invitation "as long as Prime Minister Berlusconi has nothing against it".
