What is the stability and growth pact?
Adopted by the eurozone in 1997, the pact was set up to enforce budgetary discipline among the 12 countries now using the euro, with Germany the moving force behind the arrangement.
Why Germany?
When the eurozone was created, control of interest rates passed to the European Central Bank (ECB), whose job was to control inflation. Fiscal policy - taxes and spending - remained with national governments. Germany - with its traditional fear of inflation - wanted to make sure that no one (it had Italy and Greece in mind) would evade the ECB's anti-inflation policy by cutting taxes and spending as if there was no tomorrow.
So what went wrong?
Germany - yes, the main instigator of the pact - and France have been stuck in recession or stagnation for the past three years. For the third year in a row, they have breached one of the keystones of the pact - keeping budget deficits below 3% of gross domestic product, the total value of goods and services the economy produces. With their economies stagnant, tax receipts are down, while public spending in terms of unemployment benefits have gone up.
Are Germany and France being punished?
No. Theoretically, Germany and France faced big fines on the recommendation of the European commission. But imposing financial penalties when they're already mired in economic problems made little sense. So the commission this week recommended that Germany and France bring their deficits under control by next year.
Were those recommendations accepted?
The EU's council of finance ministers - which includes Gordon Brown, the UK chancellor - brushed aside the commission's recommendation and gave the eurozone's two largest economies an extra year's grace. France and Germany therefore will be allowed to break the 3% rule again in 2004.
Is the pact dead?
It certainly is in intensive care and will probably have to be changed. Germany wants to draw up additional EU fiscal rules that will lead to a "better interpretation" of the pact, allowing more account to be taken of the economic situation, the impact of ageing on social security systems and the role played by public investment in modernising the economy. Mr Brown has consistently criticised the pact for its rigidity. In Mr Brown's economic framework, countries should be allowed to run deficits in bad times provided they accumulate surpluses in good times.
What has been the political fallout?
The rift between the big and small countries has deepened. In the case of Portugal and Ireland, the pact was applied more strictly and smaller countries, such as Austria, have made greater efforts to abide by it. So these smaller countries resent what they see as a case of double standards.
Does the pact's problems have wider ramifications?
The rift could threaten other common policies and EU projects, including the planned EU constitution, where the balance of power between big and small states is already a contentious issue. The rumpus over the pact also reinforces the hand of eurosceptics who will argue that Britain is better off by staying out of the single currency.
What are the financial repercussions?
Analysts say the damage inflicted on the pact could jeopardise economic growth. Because France and Germany have driven a coach and horses through the arrangement, discipline will have to come from elsewhere: the ECB.
What could the ECB do?
The ECB has made it clear that it will need to follow a tighter monetary policy. This does not necessarily mean higher interest rates to punish France and Germany, but it may allow the euro to rise against the dollar. That would make it harder for Germany to export - a key source of growth. Without higher export revenues, Berlin will have to trim public spending to keep the budget deficit under control. Tighter money in the eurozone will affect everyone and as Deutsche bank said in a briefing note, the smaller states fear that Germany and France are shifting their budget problems onto them via higher interest rates.
So was the pact a silly idea to start with?
The basic premise made sense. It would have been impossible to launch the euro without a framework to promote financial discipline in a currency union not complemented by political union. But the framers of the pact left the ups and downs of the economic cycle out of the reckoning. They would have avoided the current bust-up if they had not insisted on countries keeping to the 3% rule every year. In contrast, Mr Brown measures borrowing over the economic cycle (which could last as long as 10 years).