It smells like political influence going on behind the curtain and it weakens the Stability Pact

Manuela Preuschl Deutsche Bank

Just two weeks ago, the commission voted to issue a formal warning to Germany and Portugal over the size of their budget deficits.

But instead the commission appears to have backed down, agreeing to waive the warning after receiving an assurance of extra vigilance in the future.

Under the compromise, Germany and Portugal have promised to come close to a balanced budget by 2004.

The UK is also coming under fire from the commission about its spending.

And Chancellor Gordon Brown is reportedly furious about pressure from Brussels to curtail the Treasury's spending plans.

Narrow view

The Commission's official warnings have never been used before under the terms of the stability pact.

In 1997, member countries agreed the pact in order to make sure the eurozone's economies keep in step with each other.

Mr Brown backed greater leniency

While neither Germany nor Portugal has yet breached the 3% deficit limit, both are at risk of doing so this year, prompting the commissioner for monetary affairs, Pedro Solbes, to ask for the warning.

But several ministers vowed to oppose the warning, saying they felt the commission was being over-zealous, especially where Germany is concerned.

"Far too narrow a view of the Stability Pact has been taken by the Commission generally," UK Chancellor Gordon Brown said at the weekend.

Weakening the pact

Mr Solbes said that Tuesday's deal was a "good compromise", but stressed the warning system remained an essential part of the stability pact.

Mr Solbes requested Germany's reprimand

But while Chancellor Schroeder is likely to be especially pleased that Germany has been let off the hook, analysts and economists expressed some initial concern.

"It smells like political influence going on behind the curtain, and it weakens the stability pact," Manuela Preuschl, senior economist at Deutsche Bank in Frankfurt told BBC Radio's Five Live.

And Germany's BGA foreign trade group warned that the weakening of the pact could harm the long-term value of the euro.

Germany's opposition politicians were also disgruntled, with former finance minister Theo Waigel, who pressed for the stability pact in the 1990s, called it a "rotten compromise."

But their was little immediate effect on the exchange rate.

And a spokesman for the European Central Bank said the compromise strengthened rather than undermined the deal.