Under the new rules countries breaking the deficit limit of three percent of GDP will now have their individual economic situations taken into account.

They will also be able to escape punishment if their economies have suffered a period of sluggish growth. At present, only a severe recession can result in member states being allowed to breach the ceiling.

But fiscal hardliners will be glad that the three percent limit remains intact and that there will be an emphasis on building up surpluses during times of economic growth to avoid deficits during downturns.

There will also be a greater emphasis on debt, rather than the current concentration on deficit, something that will please France and Germany, with relatively low debt levels (although still over the maximum permitted level) compared to Italy, whose debt is over 100 percent of GDP.

'Intelligent' pact

Presenting the proposals, Commission President Romano Prodi said that the reforms would make the rules "more intelligent", in a jocular reference to his now famous attack on the Stability and Growth Pact as "stupid".

He also emphasised the consensual nature of the proposals, saying that "the proposals present a credible compromise between economic soundness and political realism".

Echoing these words, Economics and Monetary Affairs Commissioner Joaquin Almunia described the proposals as "a trade-off between economic rationale and simplicity".

He added, "It is my firm belief that these proposals will provide for a stronger and more credible pact".

But he also agreed with current Dutch finance minister and current head of the ECOFIN council of finance ministers that the debate on reforming the pact will probably slip into the Luxembourg presidency which begins on 1 January.

\"Broadly positive\"

Member states were cautious in their reaction. The Dutch said that they "welcomed" the communication and that the document provided a "good basis" for discussion.

Sources from the French government were more upbeat describing the proposals as "broadly positive".

"One of the great merits is that it takes into account not only when the economic situation is bad, but also when it is good", said the diplomat.

German Finance Minister Hans Eichel said that the proposals were "what I've been calling for all along", according to AFP.

Finance Ministers will now discuss the plans at an informal meeting in the Netherlands next weekend (10-11th September).