A chorus of denials from European political leaders has failed to remove the suspicion that they may have damaged Europe's monetary union by allowing Germany and Portugal to escape censure over their rising budget deficits.

Outright condemnation of the deal from Germany's centre-right opposition and from Jürgen Stark, the Bundesbank's president, has been balanced by public support from the European Central Bank.

In financial markets, opinion is divided about whether the deal will strengthen or weaken the 12-nation eurozone's ability to enforce common rules on fiscal discipline.

Ultimately, the verdict hangs on whether or not the German and Portuguese governments fulfil their promise to rein in spending, a commitment they made in exchange for avoiding rebuke from their European Union peers.

Germany's deficit last year was 2.6 per cent of gross domestic product, close to the 3 per cent limit set by the EU's stability and growth pact. Portugal's was 2.2 per cent.

Economists say lower deficits that derive purely from an economic upturn that generates higher revenues will not be enough to convince the markets. Instead, German and Portuguese leaders must show political courage and tighten public expenditure.

"To balance budgets, governments would have to tackle politically sensitive areas of spending such as pensions, health and unemployment benefits," says José Luis Alzola, economist at Schroder Salomon Smith Barney bank.

On one point there is broad agreement: Gerhard Schroder, Germany's chancellor, insisted on the deal because he feared political damage ahead of next September's national elections.

Klaus-Dieter Frankenberger, a commentator for the Frankfurter Allgemeine, a conservative-minded German newspaper, called the deal "an impudent show of power politics for the sake of a presumed short-term advantage".

At the Bundesbank, Mr Stark damned the deal as "a danger for the euro and the whole project of monetary union".

However, Raymond van der Putten, economist at BNP Paribas, said the deal showed that peer pressure among eurozone governments could be effective in extracting commitments to fiscal discipline.

He cautioned: "After the German elections, the European Commission should step up pressure on the incoming government to honour [this week's] commitments."

Whoever wins the elections will face a difficult task, said Stephen Lewis of Monument Derivatives. Although the government blames its rising deficit on the economic slowdown, part of the loss of revenues was caused by tax cuts last year.