EU faces moment of truth on budget reform -Rehn

* EU’s Rehn underlines need for tough budget reforms

* Dutch minister sees waning enthusiasm in some countries

* Ministers aim to agree on report on changing budget rules

By Marcin Grajewski

LUXEMBOURG, Oct 18 (BestGrowthStock) – The European Union’s monetary
affairs chief urged member states to agree on tough budget
reforms on Monday after some countries said enthusiasm for
far-reaching change was waning.

He made his comments before euro zone finance ministers met
in Luxembourg to complete an overhaul of EU budget rules and
agree on a report for EU leaders on how to make the rules
tougher, to prevent a new sovereign debt crisis.

“This is now the moment of truth for the EU member states
whether they are genuinely for reinforced economic governance or
not,” Economic and Monetary Affairs Commissioner Olli Rehn said.

He underlined the need for reforms that ensure budget
discipline is enforced and debt is kept in check, adding:
“Passing them is the litmus test for being serious about
economic governance.” [ID:nLDE69H06K]

Ministers were expected to review the outcome of this
month’s Group of Seven and International Monetary Fund meetings
in Washington, including the likelihood of “currency wars”, and
prepare for a G20 finance ministers’ meeting in South Korea.

The euro has jumped 8 percent against the dollar in the last
month and 18 percent since June, raising fears the currency
bloc’s exporters will increasingly struggle.

But the main focus on Monday was likely to be deficit
sanctions, the biggest overhaul of the fiscal rules underpinning
the euro since its creation in 1999. [ID:nLDE69H046]

DIVISIONS OVER REFORMS

Groups of countries led by Germany and France have different
views on how much say the 16 euro zone finance ministers should
have in deciding sanctions for deficit and debt limit offenders.

The resolve to toughen fiscal rules may be waning in some
countries because any immediate danger of a full-blown sovereign
debt crisis is widely thought to have passed, despite the
problems suffered by Greece this year.

“A lot of member states are getting cold feet now, but
during the crisis this spring, we saw what the sovereign debt
crisis can do,” said Dutch Finance Minister Jan Kees de Jager.

Rehn sought to play down the reforms as he arrived for the
talks on a cold morning, saying: “It maybe be very chilly here
but I don’t yet see any cold feet.”

The executive European Commission presented last month a set
of proposals [ID:nLDE68S1CN] to impose sanctions on euro zone
countries breaking the Stability and Growth pact, the EU fiscal
rulebook, much earlier and with less ministerial discretion.

Germany, the Netherlands and Nordic countries want sanctions
imposed almost automatically on countries that do not abide by
the EU’s 3 percent of GDP limit on budget deficits and public
debt limit of 60 percent of GDP.

Under the Commission’s proposals, only a qualified majority
of EU finance ministers could stop the imposition of an
interest-bearing deposit, a non-interest bearing deposit or a
fine on the offending country if it keeps overspending.

But euro zone sources say some would like to stick to an
arrangement where the European Council — the EU member states’
governments — has to make a political decision each time. This
camp is led by France and includes Spain and Italy.

NO NUMBER EXPECTED ON DEBT

The Commission also proposed that countries which have debt
higher than 60 percent should reduce it by one twentieth of the
excess over the limit annually.

EU sources said the ministers’ report to EU leaders would
not mention any numerical value, just an agreement that debt
would have to decline at a “sufficient pace”. Otherwise the
country would face disciplinary action entailing sanctions.

The sources said there was also an idea to link the pace of
the reduction to whether or not a country had a budget close to
balance or in surplus.

A further hurdle was a proposal for sanctions on countries
that do not adjust their excessive macroeconomic imbalances as
suggested by the Commission, which some countries think would
give the EU executive too much say over national policies.

The ministers were also seeking agreement on a formulation
of the Commission’s proposal that EU countries should inscribe
prudent fiscal rules into national legislation.

Finally, the ministers were expected to discuss how much to
commit themselves to creating a permanent mechanism for crisis
resolution in the euro zone in the future.

The 16-country area has so far only agreed on ad-hoc
solutions for emergency financing — an 80 billion euro ($112
billion) bilateral loan package for Greece and a 500 billion
euro European Financial Stability Mechanism for all euro zone
states.
(Writing by Timothy Heritage, editing by Rex Merrifield and
Catherine Evans)
(Brussels newsroom, +32 2 287 6830)
($1=.7153 Euro)

EU faces moment of truth on budget reform -Rehn