EU exec wants more teeth for EU budget rules

By Jan Strupczewski

BRUSSELS (BestGrowthStock) – The European Commission proposed new sanctions on Wednesday to enforce compliance with European Union budget rules and called for national budgets to be coordinated with Brussels before parliaments vote on them.

France and Germany welcomed the overall direction of the proposals by the EU executive, but also stressed that national parliaments’ sovereignty would remain intact.

Outlining proposals for strengthening economic cooperation in the 27-country bloc following Greece’s debt crisis, European Commission President Jose Manuel Barroso said member states had to have an incentive to meet fiscal targets.

Under EU rules, deficits must not exceed 3 percent of gross domestic product and debt must not be more than 60 percent of GDP. But just three countries are expected to meet the deficit criterion this year and only 13 are likely to comply on debt.

This has caused financial markets to doubt the credibility of EU budget rules and pushed up borrowing costs for some EU member states, increasing fears of a sovereign debt crisis.

“Let’s be clear — without sanctions it will not be enough for credibility,” Barroso told a news conference.

The budget rules, included in the EU’s Stability and Growth Pact, were revised in 2005 but the trend then was to make them more accommodating for budget offenders.

That was because the revision of the rules was triggered by the non-compliance of Germany and France, which refused to accept tougher EU disciplinary steps against them.

The rules still lack the threat of tough sanctions to offset the political cost of fiscal tightening.

“We must acknowledge shortcomings. Peer pressure lacks teeth, the good times were not used (well) … and macroeconomic imbalances were ignored,” Economic and Monetary Affairs Commissioner Olli Rehn told the news conference.

Rehn and Barroso were at pains to make clear they were talking only about closer and earlier coordination of budget policy, not the right to veto.

They see this as a chance to reinforce economic policy coordination and fiscal discipline in Europe and regain the trust of markets and consumers.

FRENCH, GERMAN REACTION

Paris and Berlin welcomed the Commission’s proposals, with German Chancellor Angela Merkel saying they went in the right direction and that it was not a bad thing that the Commission wanted to have an early look at national budget plans.

French government spokesman Luc Chatel said Paris backed the better fiscal and budgetary co-ordination but added: “It’s parliament that votes on the nation’s budgets, it’s not the European Commission that votes on the budget of the French nation.”

German Vice Chancellor Guido Westerwelle said budget policy was at the core of national parliaments’ rights.

Financial markets have already punished many euro zone countries by sharply raising their borrowing costs, in effect

refusing to lend to Greece after it repeatedly broke EU budget rules and cheated on statistics.

Fearing the Greek debt crisis could spread to Portugal and Spain, policymakers have put together a $1 trillion safety net of financing to assure markets that euro zone states will honor their debt obligations.

But the Greek crisis showed that mechanisms in place under the EU budget rules were insufficient to enforce fiscal discipline.

The Commission proposed countries that are not moving toward a balanced budget or surplus when economic growth is above potential should place interest-bearing deposits with the Commission.

So far, non-interest bearing deposits which could eventually be converted into fines were a potential penalty at the last stage of disciplinary budget steps against euro zone countries which repeatedly failed to shore up their public finances.

Barroso said the Commission would now push for an earlier and speedier start to the disciplinary budget steps, known as the excessive deficit procedure.

EU states that do not use the euro could not be fined, although suspending the flow of EU funds to such member states was possible. As in the case of the euro zone sanctions, this option has never been used.

The Commission said the suspension of EU funds for repeated budget sinners should now be considered more quickly and more rigorously.

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(Reporting by Jan Strupczewski; Editing by Timothy Heritage and Susan Fenton)

EU exec wants more teeth for EU budget rules