In the end they managed to do a deal. Late on Sunday - after weeks of haggling - European finance ministers finally reached a compromise over the Stability and Growth Pact. The 3 per cent limit on budget deficits for those nations that have adopted the single European currency remains, but there will be a long series of get-out clauses.

In the end they managed to do a deal. Late on Sunday - after weeks of haggling - European finance ministers finally reached a compromise over the Stability and Growth Pact. The 3 per cent limit on budget deficits for those nations that have adopted the single European currency remains, but there will be a long series of get-out clauses.

Germany, which has been in breach of the terms of the stability pact for the past three years, won the biggest concession. It will be allowed to offset its budget deficits against the substantial subsidies that it has paid to the east since 1990. It is claimed that this financial outlay deserves special consideration because re-unification was so important for the whole of Europe. France also came away satisfied. It will be able to offset its deficits against its expenditure on defence - which is, apparently, something else that benefits the whole of Europe. The new members of the EU were persuaded to let the two big powers have their way by promises that they will be allowed to offset their own deficits against pension spending. As they gathered for a summit in Brussels yesterday, EU leaders must have felt as if a weight had been lifted from their shoulders.

But not everyone is happy. The European Central Bank has expressed concern at the weakening of the pact. There is resentment in countries such as Austria and the Netherlands as they have bent over backward to stick to an agreement that has now been fundamentally altered to suit the larger European economies.

Yet in Britain, the reform of the pact has been greeted with indifference. This is because the prospects of Britain joining the euro any time soon are dead in the water. The Chancellor barely mentioned Europe in his Budget speech last week - let alone any timetable for entry to the single currency. The debate about the fiscal constraints on his European counterparts no doubt seems irrelevant to Gordon Brown. But complacency would be a dangerous attitude to adopt. Britain may not be in the euro, but we still have a vested interest in the economic health of our continental trading partners.

A loosening of the stability pact - designed in an era when inflation was the overriding fear of policy-makers - was inevitable. At the moment, one of the major ailments in the eurozone is weak demand, especially as a stronger euro hurts exports. Some form of fiscal stimulus is certainly required. But on its own, that would not be enough. It could even be dangerous. As the European Central Bank has warned, if the governments of Europe begin spending irresponsibly, confidence in the single currency will rapidly drain away. And democratic governments are notoriously susceptible to pressure to increase public spending - especially in times of recession.

What the sluggish economies of Europe require is fundamental structural reform. Its labour markets must be liberalised and there needs to be deregulation of industry. There is still a belief, particularly in France, that greater competition on the "Anglo-Saxon model" is a threat - rather than a stimulus to growth and greater prosperity. It is imperative that European governments use the greater flexibility of the reformed stability pact to enact these vital reforms, rather than just as a short-term device to buy their way out of trouble with their respective electorates.

This will not be easy. Both the French and German governments have run up against substantial resistance from vested interests in their efforts to implement reform. But there are signs that Europe as a whole is moving in the right economic direction. In some of the new EU nations, unemployment is low and there are actually budget surpluses. The President of the European Commission, Jose Manuel Barroso, is making the right noises about the need for reform. And it is worth remembering that France and Germany still have enviable productivity per man-hour rates. The reform of the stability pact could end up being a catalyst for strong European growth. And that is certainly something that would force Britain to take sit up and take notice.