RPT-PREVIEW-France, Germany to clash over automatic EU sanctions

(Repeats Friday’s story without changes)

By Jan Strupczewski

BRUSSELS, Oct 15 (BestGrowthStock) – Groups of countries led by
Germany and France are likely to clash on Monday over how much
say euro zone finance ministers should retain in deciding
sanctions for deficit and debt limit offenders.

Finance ministers meet in Luxembourg to complete an overhaul
of EU budget rules started in May and to agree on a report for
EU leaders on how to make the rules tougher to prevent the next
sovereign debt crisis, like that triggered by Greece.

They will also review the outcome of the G7/International
Monetary Fund meetings in Washington, particularly the
likelihood of so-called ‘currency wars’, and prepare for the G20
finance ministers’ meeting in South Korea at the end of the
week.

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

But it is the debate on deficit sanctions, the biggest
overhaul of the fiscal rules underpinning the euro since the
single currency’s creation in 1999, which could cause the most
fireworks.

The plan backtracks on a reform from 2005, which then gave
budget sinners more leeway after Germany and France had refused
to accept EU disciplinary action against their bulging deficits.

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.

“There is a broad agreement on that — the sanctions, etc.
but there are different views on how fast the procedure should
be and what should be the role of the Council (of ministers),”
said one euro zone source preparing the meeting.

Germany, the Netherlands and Nordic countries would like to
see 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 some would like to stick to the current arrangement
where the Council has to make a decision each time and it is up
to the political discussion in the Council to decide if there
are sanctions or not,” a second euro zone source said.

This camp is led by France, whose Economy Minister Christine
Lagarde said last month a degree of political input into the
process was essential and that the fate of a country could not
be put totally in the hands of experts.

“France is quite outspoken about this so other countries,
which have similar views, don’t have to be so outspoken — they
can hide behind France and let Paris do the dirty work,” the
second source said. Italy and Spain were backing France.

NO NUMBER ON DEBT REDUCTION YET

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.

Sources said that 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”, or the country
would be placed under disciplinary action called the excessive
deficit procedure, which would now entail sanctions.

“The required speed of the reduction will be specified
later, during the drafting of the legislative proposals after EU
leaders give their approval at the Oct. 28-29 summit,” the first
source said.

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 — what the EU calls a medium term
objective for fiscal policy.

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

The ministers will also seek to agree on a formulation of
the Commission’s proposal that EU countries should inscribe
prudent fiscal rules into national legislation, like Germany or
Poland have.

Finally, the ministers will 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
bilateral loan package for Greece and a 500 billion euro
European Financial Stability Mechanism for all euro zone states.

Germany and its backers would like to see a more permanent
solution, but both the ministers and the Commission prefer to
wait until next year to see how the temporary mechanisms work,
to draw on that experience in designing a permanent one.

“There is definitely going to be a paragraph in the report
on that, the question is — is it going to be a general
declaration that we are going to have a discussion about or if
it is going to be a more precise setting-out of the principle
elements of such a scheme in the future,” the source said.

(Reporting by Jan Strupczewski, editing by Toby Chopra)

RPT-PREVIEW-France, Germany to clash over automatic EU sanctions