THE EUROPEAN Commission has proposed hard-hitting “semi-automatic” sanctions against countries that repeatedly violate EU budget rules, saying the toughening of the union’s economic system would help prevent any repeat of Ireland’s property bubble.
Legislative proposals from economics commissioner Olli Rehn come amid signs of growing alignment on the EU’s governance system at an ad hoc taskforce of finance ministers chaired by European Council chief Herman Van Rompuy.
Mr Rehn wants his plan to take legal effect at the start of 2012. It includes tougher but graduated financial penalties for rule-breakers to compel them to reduce national debt.
The system also introduces a new “alert mechanism” based on a “scorecard” of economic indicators that would trigger formal warnings for excessive increases in property prices, personal and public debt levels, real effective exchange rates and current account balances.
This would form the basis of “excessive imbalance procedure” under which finance ministers would set a deadline for corrective action. A “yearly fine” would be imposed on governments that refuse to take appropriate action.
The new mechanisms are designed to replace the current system, under which major member states flouted official rules with impunity. They will operate alongside new provisions under which EU governments will from next year submit draft budgets to Brussels before they are introduced in parliament.
“It is about making sure the rules are in place and are properly respected so that the financial crisis cannot happen again and citizens do not again have to pay the price. We need sound public finances and governments that live up to their responsibilities to future generations,” said commission chief José Manuel Barroso as the plan was unveiled.
The proposals must be approved by MEPs and EU governments, which are under pressure to fortify the single currency system in the light of Greece’s brush with bankruptcy and mounting pressure on Ireland and other distressed euro members such as Portugal.
While a German call for the penalty of suspending EU voting rights has divided EU leaders, Mr Rehn makes the point that the commission’s proposals can be introduced within the ambit of current EU treaties. However, Berlin opposes the principle of imposing fines on countries that are struggling to balance their books. France, meanwhile, is against plans for the commission to automatically apply sanctions unless blocked by a “qualified majority”, which sees bigger countries having more votes.
Euro members would have to make an interest-bearing deposit amounting to 0.2 per cent of gross domestic product (GDP) – €363 million in Ireland’s case, based on 2008 figures – if they failed to keep annual expenditure growth within a “prudent medium-term rate of growth of GDP”.
Only a “reverse voting” mechanism could prevent such a penalty being imposed – the deposit would become due unless a qualified majority of the council of EU finance ministers decided to the contrary. “The deposit would be returned with accrued interest once the council considers that the deviation is corrected,” the commission said.
A similar deposit would have to be made if countries repeatedly breached the 3 per cent budget deficit limit and failed to make enough progress toward reducing their national debt to the limit of 60 per cent of GDP.
The deposit “would be converted into a fine in case of non-compliance with the initial recommendation” and further non-compliance would increase the fine. However, the reverse voting mechanism would give political leeway to prevent penalties.
In the case of debt levels, the commission said a debt-to-GDP ratio above 60 per cent would be considered “sufficiently diminishing” if the excess over 60 per cent reduced over three years at a rate of one-twentieth per year.
