BRUSSELS - European Union leaders endorsed looser budget deficit rules on March 22 that should spare Germany and France from punishment, and backtracked on a controversial plan to liberalize the market for services.

The 25 leaders agreed to ask the European Commission to rewrite a bill to throw open businesses ranging from computer services to plumbing to cross-border competition that threatens to derail a May 29 referendum on the EU Constitution in France.

The proposal had fuelled trade union protests against feared job losses and helped propel the "no" camp into the lead in opinion polls, causing alarm at the risk of derailing the landmark constitutional treaty to reform EU institutions.

"The directive will not be withdrawn, but amendments will be made to respond to the demands of the European social model," Luxembourg Prime Minister Jean-Claude Juncker told a news conference after chairing the first day of an EU summit.

Leaders of the new East European member states, who see liberalizing services as vital to enable their economies to catch up with western Europe, said they had made a gesture to help French President Jacques Chirac win the referendum.

"The stakes are very high in this debate. We could not but show a minimum of flexibility, if the result could be serious disruption to the ratification of the constitution," Polish Prime Minister Marek Belka said.

The leaders rubber-stamped a deal negotiated by their finance ministers on March 20 under which countries will be given more time to bring excess deficits back under the EU limit and can claim exemption for all sorts of public spending.

Greater leeway

The European Central Bank (ECB) voiced serious concern on March 21, warning that laxer fiscal discipline could undermine confidence in the euro. Juncker said some reactions to the deal had been "excessive", but he declined comment on the ECB statement.

Chirac said the changes in the Stability and Growth Pact, meant to underpin the euro, would give greater leeway for public spending on defence, development aid and research.

He came to Brussels demanding a far-reaching revision of the so-called "Bolkestein directive" on services, which he said was unacceptable for France and other countries, including Sweden, Denmark and Germany.

But the leaders all recognized the need to open up the services market, which accounts for 70 per cent of the EU economy, and no one called for it to be scrapped.

The European Commission believes liberalizing services holds the key to rekindling Europe's anaemic economic growth, forecast to be less than 2 per cent this year - half the US rate.

Trade unions and the left, echoed by many centre-right governing politicians, have warned against "social dumping" - undermining wages, consumer rights and environmental standards by an influx of service-providers from low-cost countries.

'Protectionism'

Estonian Prime Minister Juhan Parts said he understood the fears of "social dumping", but EU history showed that countries that opened their markets prospered, citing Sweden and Ireland as examples.

European Commission President Jose Manuel Barroso said charges that the proposal would undermine workers' rights were unfounded. However, he pledged amendments to take account of key French concerns, notably by exempting public services, including health, and guarding against "social dumping".

The leaders agreed to relaunch the so-called Lisbon Agenda of economic reforms, adopted in 2000 with the objective of making Europe the world's most dynamic, knowledge-based economy by 2010, a target date which has been dropped as unrealistic.

Progress has been slow, especially in the core euro zone countries - Germany, France and Italy - and the EU economy has fallen further behind the United States. Unemployment stands at close to 9 per cent.

But a growing realization of the need to cope with an ageing population and rising competition from Asia has spurred the EU to try to refocus the broad initiative on a more limited set of targets to boost growth and jobs.

The new priorities cover increasing employment levels, promoting research and innovation, investing in infrastructure and reforming health and pension systems.

Instead of naming and shaming laggards, the European Commission is urging national governments and parliaments to take charge of the economic reform agenda and appoint national bodies to accelerate change.

(Agencies via Xinhua)