EU Finance Ministers Approve Stricter Budget Rules

Reuters

European Union finance ministers gave final approval on Tuesday to tougher EU budget rules intended to prevent another sovereign debt crisis in the future, ending a process that started in 2010 with the eruption of the Greek debt crisis.

The new rules will make it easier to quickly slap financial penalties on euro zone countries breaking EU debt and deficit limits of 60 percent and 3 percent of GDP, respectively, and to thoroughly scrutinize the economies of the 27-nation bloc.

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The rules will become law on January 1, 2012 at the latest.

They will apply mainly to the 17 countries sharing the euro, whose debt the markets have in their sights after Greece, Ireland and Portugal had to seek emergency funding from international lenders because of bloated accounts.

There will also be penalties for governments running budget deficits of less than 3 percent, but not moving toward the agreed EU goal of a budget close to balance or in surplus.

The EU began a review of its fiscal rule book in the first half of 2010 and last September the Commission presented six proposals -- dubbed the 'six-pack' -- to examine EU national economies more thoroughly and penalize rule-breakers.

Haggling over how easily sanctions should be imposed on euro zone countries breaking the rules has led to the debate dragging on until now, despite the raging euro zone debt crisis.

France and Germany wanted more political discretion in imposing sanctions on rule-breakers, trying to weaken the Commission's initial idea of making sanctions almost automatic.

But with the European Parliament and the European Central Bank pushing to eliminate the political horse-trading, and with pressure from markets keen to see the euro zone can make fiscal policies sustainable, a deal was reached last month.

PREVENTION BETTER THAN CURE

The deal gives teeth to the existing -- but not observed -- EU rule that countries should not only not run budget deficits, but that they should seek budget balance or a surplus.

Those who ignore the balanced budget goal will face financial sanctions if the European Commission, the EU's executive arm, issues a warning that the country is straying from the right fiscal path.

While there are several procedural steps, in the end such a warning can only be rejected, and therefore the sanction process stopped, if nine out of the euro zone's 17 finance ministers vote it down twice and explain themselves in writing.

So far, a majority of ministers had to vote in favor of penalties, rather then vote to stop them.Parliament will also be able to ask the finance minister of the country receiving the warning to explain its policies before the EU Parliament's economic affairs committee.

Similarly, financial sanctions would be imposed on those who did not try to reduce their public debt to the EU-accepted limit of 60 percent of GDP fast enough.

More financial penalties would swiftly await those who run budget deficits higher than 3 percent of GDP and those who fail to address major imbalances in their economies despite warnings from the Commission and other euro zone members.

The Commission would monitor the economies of euro zone countries to detect any macroeconomic imbalances that could become a problem for the wider euro zone.

In assessing if a country has macroeconomic imbalances, the Commission would look at countries that have large current account deficits, but also large current account surpluses -- although the latter would likely be treated with more leniency.