BRUSSELS, March 22 -- European Union leaders on Tuesday changed the rules underpinning their common currency, meeting German and French demands for more room to spend their way out of economic problems.
The 25 E.U. leaders kept the rule that annual budget deficits may not exceed 3 percent of gross domestic product but gave the 12 nations using the euro more freedom to disregard that limit in special circumstances.
The pact approved Tuesday had been set up by finance ministers Sunday, ending five months of negotiations between nations seeking to maintain financial rigor and those seeking budgetary freedom to stimulate their economies.
German Finance Minister Hans Eichel said looser euro rules make economic sense because they permit public spending that can spark growth. He said the stability pact was not dead.
"The pact was . . . adjusted toward stability and growth. It can now be used in an economically smart, growth-oriented way," he said. "The reform of the pact is no license to get into debt."
Annual budget deficits and debts are still limited to 3 percent and 60 percent of gross domestic product, respectively. However, there will be escape routes for governments to invoke in instances when they think they should escape sanctions for violating those criteria.
Under the new rules, officials said, the European Commission will apply the regulations in a more practical way, focusing on growth when evaluating a country's spending.
In recent years, France and Germany ignored instructions from the E.U. to reduce their deficits. In the future, governments with deficits larger than the rules permit can temporarily escape sanctions if they show that their spending is for a worthwhile purpose.
Any country exceeding the 3 percent deficit cap may get as long as five years to come back into compliance.
Nations also may invoke spending related to unspecified "European unification" projects to exceed the 3 percent limit.
The euro is the common currency of 12 E.U. nations: France, Germany, Italy, Spain, Portugal, the Netherlands, Belgium, Luxembourg, Ireland, Austria, Finland and Greece. Most of them have budget deficits larger than allowed -- more than 6 percent of GDP in Greece's case.
Eichel said he expected "difficult negotiations" on the E.U. budget in the six years beginning in 2007.
He said the new euro rules will not make Germany drop its long-standing demand that the E.U. budget in the years ahead be limited to 1 percent of the E.U.'s GDP.
The European Commission -- and many E.U. governments, especially those that joined the union last year -- want a limit of 1.14 percent.
