Yielding to French pressure, Germany on Monday softened its stance on stricter eurozone budget rules, officials said, angering governments that counted on Berlin to force through sanctions for nations living beyond their means.
Ahead of a two-day meeting of EU finance ministers, Germany was an ardent proponent of a proposal by the European Commission, the EU's executive, to impose near-automatic sanctions on nations that breach the bloc's deficit and debt levels.
But at the meeting, Berlin softened its stance under pressure from France and others reluctant to transfer too much power to unelected Brussels bureaucrats.
"Germany is more open now" to other options, said an EU official who asked not to be named because the discussions were still under way.
Other officials said Sweden, Finland and the Netherlands _ three countries that counted on Germany to insist on sanctions _ were frustrated by the apparent German turnaround.
"There are times in history when you need to be bold and this is one of those times," said one diplomat who insisted on anonymity. He said if Germany cuts a deal with France "to water down the sanctions, this is going to be a bad day for Europe and the euro."
The EU head office wants to force member states whose deficit tops 3 percent or whose debt hits 60 percent of gross domestic product to set aside up to 0.2 percent of their GDP. If they ignore suggestions on how to fall back into line, their deposits may be converted into fines. Only a majority vote of EU finance ministers could overrule sanctions.
Finance minister were also divided over when new rules should take effect. Italy in particular wants more time to slash its debt load, now at about 120 percent of GDP.
Pressure on EU member states to get their economies in order is mounting as a surging euro is casting doubt over the continent's fragile recovery.
In what some have called a "global currency war," governments worldwide try to boost their economies by pushing down the value of their currencies to make their exports more competitive.
The U.S. Federal Reserve on Friday spurred expectations of a new round of asset purchases, in effect pumping dollars into the economy and further weakening the value of the greenback. The euro was at $1.38 Monday morning Europe time, from under $1.29 in early September.
"Countries should not use currency as a means of competition," Dutch Finance Minister Jan Kees de Jager said as he arrived in Luxembourg.
Yet, the European Central Bank, which sets monetary policy for the 16 countries that use the euro, appears likely to remain on the sidelines in any currency war.
Top EU officials, including ECB President Jean-Claude Trichet, have complained about China _ a major trade partner _ intervening to keep its currency weak. But the eurozone appears unlikely to take action beyond talk and diplomacy.
A hands-off policy by the ECB could mean trouble for the currency union's weakest members, which are facing harsh government budget cuts and are desperate for export-led growth.
"The eurozone is likely to be the loser in this," said Simon Tilford, chief economist at the Centre for European Reform in London. He says big Asian economies like China and South Korea will race to keep their own currencies stable against the dollar.
The EU finance ministers will also prepare their position for a meeting with their counterparts in the Group of 20 rich and developing nations beginning Friday in Seoul, South Korea.