EU proposes tougher budgetary rules to prevent repeat of government debt crisis

Wednesday, September 29, 2010

EU proposes tougher budget rules

BRUSSELS — The European Commission on Wednesday proposed slapping new penalties on countries that let their budgets spiral out of control, hoping to prevent another crisis like the one that pushed Greece to near-bankruptcy and raised fears about the euro currency itself.

A key proposal would force countries to set aside 0.2 percent of their gross domestic product if they run up too much debt — an amount that does not sound like much but could run into billions, depending on the size of the country.

The proposals have cleaved a wide divide in the 27-nation bloc. Germany, Europe’s economic powerhouse, favors the tough new stance but France and other nations are adamant that budgets will be decided by elected politicians and not on the basis of accounting rules that some view as punitive.

As the measures were being announced, tens of thousands of workers around Europe staged a day of rage against the austerity measures that European governments are using to get their public finances back into shape following a deep economic recession.

“We will pull the handbreak before the car rolls down the hill,” said European Commission President Jose Manuel Barroso, who hailed the proposals as a “sea-change” in the way financial matters are handled in the EU.

The set-aside would be put into a noninterest-bearing account and converted into a fine if the country does not comply with EU recommendations to bring debt down toward the official limit of 60 percent of GDP or the annual budget deficit down to the 3 percent threshold.

The new proposals come after the European debt crisis showed an older set of rules aimed at supporting Europe’s monetary union lacked teeth.

Under the old rules, EU member governments never gathered the will to fine each other when they ran budget deficits that broke the limits. This inability to rein in government spending came into sharp relief when it took a last-minute euro110 billion ($140 billion) bailout in May from the International Monetary Fund and eurozone nations to keep Greece from defaulting on its government debt.

Greece’s annual borrowing in 2009 was more than four times the 3 percent limit, while its overall debt burden was around double what the rules prescribed. Although the recession and the global banking and financial crisis clearly had an impact, much of Greece’s problems lay in years of lax budgetary controls.

This time, the Commission is proposing that it will be the one to pass judgment on whether a country is punished. Member countries would then have to vote to prevent the sanction, as opposed to the previous Stability and Growth Pact (SGP) when they were both judge and jury.

EU Monetary Affairs Commissioner Olli Rehn said he hopes the proposals will eventually apply to all 27 countries in the EU, though whether that will get the support of Britain remains questionable.

For now, he said the 16 nations that share the euro currency have “the most pressing and urgent” legislative need to “reinforce their economic governance and to have an effective enforcement mechanism.”

The proposals are not law and have to be passed by the European Parliament and national governments, but Barroso insisted that the measures were democratic and compatible with the existing Treaty of Lisbon.

German Foreign Minister Guido Westerwelle welcomed the Commission’s proposals.

“We need a system of automatic financial sanctions that kicks in before it is too late and that cannot be politically canceled out,” Westerwelle said Wednesday in a statement. “Only if the member states are aware of the consequences as soon as they fail to do justice to their responsibility for stability will they change their behavior … and run solid budgets.”

France and other nations, however, have voiced unease at handing over greater fiscal powers to the Commission.

French Finance Minister Christine Lagarde reiterated her view Wednesday that national governments, and not unelected bureaucrats, should have the overriding say in any decisions over fines and sanctions.

She told reporters in Paris that the French position was “very clear: in favor of strengthening the stability and growth pact, but not at the price of removing all political input … France considers that politicians must have a say.”

Lagarde will join the eurozone’s 15 other finance ministers Thursday in Brussels. Later in the day, they will be joined by the other finance ministers of the 27-nation EU.

Analysts expect that a watered-down new EU rulebook will eventually be agreed upon.

“France isn’t on board with this, while those running bigger debts or deficits — no names required — are shuffling about in the corner hoping not to get asked any awkward questions,” said David Lea, western Europe analyst at international business risk consultancy Control Risks.

“I think we might have a case of ‘Death by Member State’ here, as the proposals are amended into blandness,” said Lea.

Sony Kapoor, managing director of the Re-Define economic policy think tank, reckons there is a fundamental flaw at the heart of the proposals. He says they mistake symptoms and causes, noting that Spain and Ireland, two of the most imperiled euro economies, never violated the original rules.

“The EC approach assumes levels of government control over economic outcomes that probably did not even exist in the Soviet Union, let alone modern market economies,” said Kapoor.


Associated Press Writer Geir Moulson in Berlin contributed to this story.

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