Bloomberg News

EU Stiffens Deficit, Debt Rules to Prevent Further Crises

September 28, 2011

(Updates with comment from lawmaker in 16th paragraph. For more on the euro crisis, click on EXT4 <GO>)

Sept. 28 (Bloomberg) -- The European Union toughened the enforcement of rules to control budget deficits in a bid to prevent a repetition of the Greece-triggered debt crisis that threatens the euro and global growth.

The European Parliament voted today in Strasbourg, France, to make sanctions more automatic against euro-area nations that breach deficit and debt limits. The tighter surveillance complements more immediate efforts by euro-area governments and the European Central Bank to prevent Spain and Italy from being engulfed by investors’ fears of a Greek default.

The EU is strengthening the threat of fiscal penalties that have never been imposed in the euro’s 12-year history, with ECB President Jean-Claude Trichet leading calls for more effective regulation. Greece, which sparked the debt crisis last year by requiring a 110 billion-euro ($149 billion) rescue, has exceeded the EU’s deficit ceiling -- 3 percent of gross domestic product -- throughout this period.

“This is a crucial pillar to prevent future crises by establishing semi-automatic sanctions for countries that ignore the rules,” said Corien Wortmann-Kool, a Dutch member who helped to steer the new measures through the 27-nation EU Parliament. The bloc’s national governments have already signaled support for the legislation, making their final approval a formality in the coming days.

Distressed Nations

The penalties are the central component of a six-piece package of laws on closer economic management that Germany has championed as aid requests from distressed euro nations have grown. The legislation makes it easier to impose sanctions on euro-area governments that let their budget deficits swell or overall debt surpass 60 percent of GDP.

The euro area is still grappling with its failure to enforce the original budget rules because aid packages for Greece, Ireland and Portugal as well as bond purchases by the ECB over the past year and a half have failed to stamp out debt concerns. The worries rattled markets in AAA rated France in August and have prompted the euro area to consider ways of bolstering its 440 billion-euro temporary rescue fund, known as the European Financial Stability Facility.

U.S. President Barack Obama said this week that the debt crisis in Europe “is scaring the world” while Treasury Secretary Timothy F. Geithner predicted European governments would step up their response. Analysts in Europe say the tougher budget oversight fills in gaps in Europe’s economic coordination.

‘Enormous Step Forward’

“The new budget-surveillance system is an enormous step forward,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “This has little relevance for the current crisis management except to show to Germany that economic governance is being improved and to help overcome German concerns about insufficient accountability in this area at European level.”

Under the new system, penalties starting with interest- bearing deposits could be imposed before a country breaches the deficit and debt limits, with the money confiscated if the government balks at repeated EU demands to fix the budget. Fines would amount to 0.2 percent of GDP.

While France succeeded in adding a fourth layer of political scrutiny over any members deviating from their targets before the imposition of fines, the voting rules will make it harder for governments to block sanctions.

‘Serious Negligence’

A one-off fine will be possible against any nation that “intentionally or by serious negligence misrepresents deficit and debt data.” Greece fudged its budget figures before the debt crisis.

A second part of the package tackles debt more aggressively, applying the tougher surveillance system to nations that veer from the EU limit. Under the new rules, Italy would have faced demands in the early 2000s for corrective budget policies as a result solely of its debt trends, according to the European Commission, the EU’s regulatory arm, which proposed the new rules a year ago.

Countries over the debt limit will have to hit an annual reduction target equal to one-twentieth of the excess under the new legislation.

A third element sets a ceiling on annual expenditure growth. Countries that fail to meet budget goals would face a spending limit below the ceiling.

‘Sound Public Finances’

A fourth feature creates benchmarks and sanctions for macroeconomic imbalances such as current-account deficits, which signaled difficulties for Portugal, and housing bubbles, which spelled trouble for Ireland. Fines in this part of the package would amount to 0.1 percent of GDP.

“Today sound public finances won,” said Carl Haglund, a Finnish member of the EU Parliament. “This is more than necessary looking at the brink of catastrophe that we are at.”

The new rules will start to take effect within weeks of final approval by EU governments, with the tougher system for monitoring debt starting three years after a country brings its current budgetary excesses into line.

Because 23 of 27 EU nations are currently deemed to have an excessive deficit, the euro-area nations in this group would face the threat of fines halfway through the new surveillance system rather than at the beginning of it. The four EU nations whose budgetary situation is deemed acceptable are Sweden, Finland, Estonia and Luxembourg.

--Editors: Patrick G. Henry, Jones Hayden

To contact the reporter on this story: Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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