COPENHAGEN (Reuters) – European Union finance ministers on Saturday denied their Stability Pact needed an overhaul but admitted the recovery had faltered, while the European Central Bank ruled out speedy rate cuts to kick-start growth. The eurozone’s largest economies all risk breaking promises to balance their budgets by 2004 and Germany, ironically the pact’s main author, may fall foul of its most important rule with a deficit ballooning dangerously near 3 percent of GDP. Harsh economic reality has sparked talk the pact must change and Italian ministers have called openly for it to be interpreted in a more flexible manner. But Rome appeared isolated during the two-day meeting of ministers and central bankers. Finance Minister Giulio Tremonti kept his misgivings to himself during the talks and the official line brushed all speculation of a shake-up aside. «Although the pace of recovery is not matching our expectations, the growth shortfall that has emerged so far does not justify altering our economic strategy,» European Economics Affairs Commissioner Pedro Solbes told a news conference. The Commission concedes that official forecasts of 1.4-percent growth this year are now too optimistic. Blaming a mixture of weak world stock markets, higher oil prices linked to concerns about a war with Iraq, and the fallout from an economic crisis in Argentina, it now says growth is unlikely to reach even 1 percent this year. An upturn, although delayed, was still on its way and would deliver higher growth next year. Even so, economists say it is senseless to force economies that are already weak to cut spending just to stick to the pact, since this could end up making matters worse. Lukewarm support for pact German Finance Minister Hans Eichel, leaving a general election campaign back home to join the meeting, said Berlin would «do everything to stay within the limits» of the Stability Pact and he «expected» the deficit to stay under the 3-percent ceiling. In any case, it looked to have won an escape clause after the Commission, and some other EU countries, said that the costs of its devastating floods last month could be kept out of the deficit calculations. France, which has already conceded it will not achieve the 3-percent growth it needs to balance the books on time, was even more candid. «The goal is shared by everyone but there are times when it is more difficult to get there. So together with the Commission we have to keep the target in mind,» Finance Minister Francis Mer told reporters. «But if it is impossible, no one is obliged to respect an impossible target. You should not put too much emphasis on the letter of an agreement, but to the spirit,» he added. Such pragmatism has made it very hard for financial markets to believe in the 2004 deadlines, although they have so far not punished French government debt. Hold the line But the EU countries that have already got their books in order take a different line, arguing that businesses and consumers would respond positively to evidence of fiscal prudence. «Spain is not of the opinion to redefine the Stability Pact. We think the pact was and is a very important tool of macroeconomic coordinated and economic stability,» Spanish Economy Minister Rodrigo Rato told Reuters. »The Euro Group meeting concluded the Stability and Growth Pact must be respected, so that whatever the circumstances, the 3-percent ceiling must not be exceeded,» Greek Finance Minister Nikos Christodoulakis, the chairman of the Euro Group, told a news conference on Friday. «It is both realistic and necessary to achieve the targets of budgets close to balance by year 2004,» he said. Those who doubt the ability of fiscal policy to give a lasting spur to growth warn that private households may save more if they fear that high state spending today means greater taxes in the future, a force they dub Ricardian Equivalence. «That has to be addressed by governments having clear-cut policies in which growth potential is enhanced, not by demand-side policies but by supply-side policies,» Rato said. ECB President Wim Duisenberg, saying there was no scope for either monetary or fiscal activism at the moment, agreed. «The best way for policymakers to restore confidence would be to pursue policies which would promote stability,» he said. Ahead of Thursday’s ECB policy meeting, Duisenberg has calmed anyone who feared the bank was still in tightening mode, saying the risks to inflation had become more balanced. But he dashed hopes the bank would give growth a lift by cutting rates. «We regard the present monetary policy… to be appropriate for the present situation and the foreseeable future,» he told a news conference as the meeting closed. Central bankers and finance ministers on Saturday inched closer to a compromise on a new financial supervision setup that could lead to a powerful new rule-making body in the bloc. The EU’s financial regulation commissioner, Frits Bolkestein, welcomed the plan, at a weekend meeting of finance ministers and central bankers, which he said would enable the union to adopt financial sector rules more quickly and efficiently. «I have repeated my full endorsement for the idea… under the current arrangements, the markets have often moved on by the time new EU rules have been agreed,» he told a news conference. The finance ministers want to endow two or more committees with rule-making powers to which the EU’s 30-odd national supervisors should then refer. Central banks, including the ECB, had voiced fears of being left out of the process. In the compromise, finance ministers would still be in charge, exclusively staffing the higher-ranking of the two groups, but central bankers would take part in a lower group, senior EU sources have told Reuters. This mollified the ECB. «The issue is still very much under discussion, and as far as I have observed the discussion, and participated in it, I am very satisfied with the developments,» Bolkestein told the conference. A final decision by the ministers is expected in October, after proposals from an EU expert group later in September. In the new setup, central banks would help prepare decisions and finance ministers would take their views fully into account. This defused a potential showdown between bankers and their political masters after the ECB and finance ministers launched rival plans earlier this year on how to allow national watchdogs to cooperate more closely. But not everyone was happy. ECB governing council member Ernst Welteke on Friday said supervision was already solid and politicians should not try to push central banks out of their role altogether. «This (EU) model is not easy to apply to the banking sector,» said Welteke, who is also Bundesbank president. He added that the EU plan was a blueprint for a single EU regulator which would be tricky to implement for banks. Not all points in the plan have been cleared up, and EU officials said Bolkestein told the meeting that cutting off Parliament entirely from the process would be unacceptable.