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EU Warns Belgium Over Debt -- Now What?

Posted by: Ben Vickers on November 18, 2011


Belgium has been warned. The nation of almost 11 million was told this week by the European Commission that it may be subjected to sanctions after failing to reduce its budget deficit. Belgium now owes the equivalent of just over 96 percent of its GDP. The spending has gone too far and plans for the 2012 budget aren’t yet in place. Given the circumstances in the euro zone, this is no time for half measures.

So what happens next? Typically, nothing happens next—the threat of sanctions has in the past been empty. No country in the euro zone has had to pay the fines that could be imposed for overspending, no doubt in part because any fine would worsen the deficit in the country affected.

EU rules on deficits have been weak from the start. This is a result of the EU’s consensus-building culture, which in other circumstances is one of the bloc’s notable strengths. There are no rules that allow the Commission or the European Parliament to impose their decisions directly on any member state. The heads of national governments or their ministers have to approve Commission and parliament decisions. They do that through the European Council, which is made up of heads of government of EU member states, and the Council of the European Union, made up of ministers from EU member states. European countries have never given the EU institutions in Brussels power to impose many rules on them, let alone sanctions—and certainly not for such issues as their domestic budget.

However, the EU and its member states have recognized this has to change. As of mid-December, a new set of tools will come into effect to help limit budget deficits. They are based on six economic governance rules—known as the “six-pack”—with which the EU has “proposed giving teeth to the corrective part of the [Stability and Growth Pact],” according to a Commission memo dated Sept. 28.

The new rules make sanctions more automatic. Still, the good intentions may remain just that, as the “six-pack” proposes excessive deficit violations be penalized by a fine of 0.2 percent of GDP, a sanction that will be blocked if a majority of government ministers disapprove. The EU gains no more leeway for imposing limits on members’ spending plans.

The Belgians may well get their accounts in order, but they won’t get any impulse to do so from the EU’s sanction threats. German Chancellor Angela Merkel and ECB President Mario Draghi can well say it’s up to national governments to do their homework and stop looking to the EU for a solution: the national governments have ensured the EU has negligible power to control them.

Photographer: Jock Fistick/Bloomberg

Reader Comments


November 19, 2011 7:37 PM

This is SO reminicent of the contagion
of hyperinflation in Germany. After it
hit Germany it just traveled throughout
Europe. If this is the case again what
will prevent events mirroring those in
of Germany past. I see these other indebted nations gathering together against the German government and the austerity plans. As the reparation payments after WW1 were too great for
Germany the austerity plans will be too
onerous for the GIIPS and now Belgium.

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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