EU finance ministers vow to reduce debt, tighten oversight; Estonia cleared to adopt euro

EU nations vow to reduce debt, tighten controls

LUXEMBOURG — European Union nations vowed Tuesday to start cutting debt by next year at the latest and to tighten oversight of each others’ finances to regain credibility with markets and rein in the debt crisis.

All but a handful of countries in the 27-nation bloc are violating EU deficit limits and their ability to reduce debt is critical to maintaining trust in their economies, keeping borrowing costs down, avoiding national defaults and restoring faith in the 16-country euro.

Despite the troubled outlook, the currency union is set to grow after finance ministers on Tuesday cleared Estonia, which has kept its spending under tight control, to join next year.

But when it gets the final word on July 13, Estonia will enter a currency union facing an identity crisis. Nations are making sweeping budget cuts that they have warned will change people’s way of life and are desperately trying to improve coordination among their economies to avoid a repeat of the debt crisis.

Even Germany, Europe’s economic powerhouse, has laid out plans to shave some euro80 billion from public spending by 2014, saying it wants to set an example for heavily indebted neighbors. Britain, whose deficit has risen rapidly since bailing out banks, says it will also cut “worse than expected” debt.

Berlin, effectively the paymaster of the EU, has already forced budget cuts on Greece, Spain and Portugal in return for pledges of financial help.

The aim now is to create rules that would be enforceable with sanctions.

The current rules limiting deficits to 3 percent of gross domestic product and debt to 60 percent have been consistently flouted — even by Germany. Only Sweden and Estonia are managing to stick to the limits both this year and last year.

EU Economy Commissioner Olli Rehn said Europe has to “safeguard financial stability and contain forest fires” to put a feeble economic recovery on a stronger footing.

EU nations have broadly agreed to impose more sanctions to deter countries cruising close to the limits from taking on more debt. All except Britain also support plans to discuss their budgets with other EU finance ministers and the European Commission before making them final. This aims to give a reality check on growth and revenue assumptions.

“It’s only a matter of EU member states respecting the rules that they have decided on,” Rehn told reporters, shrugging off concerns that the EU executive was trying to gain more oversight of national spending.

Countries will “take the final decisions,” he said, commenting on Britain’s declaration that its parliament would be the first to see any budget and decide on it.

Any new rules are mostly aimed at the 16 nations that use the euro, but would also affect Britain, which does not plan to join the currency.

The EU’s economy is expected to expand by just 1 percent this year, largely relying on a rebound in exports — and partly helped by a weaker euro which has slid nearly 22 percent against the U.S. dollar in the last six months on investor fears that governments will have trouble repaying debt.

The euro has been roiled by the fallout from a debt crisis which has exposed weaknesses in the monetary union and led to massive market pressure on governments to show they can reduce spending, even as the economic recovery remains fragile.

It has lost nearly 22 percent of its value against the dollar in the last six months.

The EU agreed the details of a massive euro750 billion ($897 billion) financial rescue package to stave off bankruptcies, but investors remain worried that the necessary spending cuts will cause years of low growth.

At the Tuesday meeting, finance ministers also gave the EU’s statistics agency Eurostat the power to audit national public finances — a move aimed at preventing countries from misreporting or falsifying statistics, as Greece did in recent years.

Bulgaria’s statistics will be next in the spotlight, Rehn said, citing “some concerns” about finance figures and saying he wanted officials to check them.

EU leaders will next week lay out broad goals to make their economies function better. They are also likely to accept more warnings and greater oversight of their economies.