The European Central Bank warned today that an EU deal to relax budgetary rules underpinning the euro could threaten confidence in the fiscal framework of monetary union.
The euro zone's central bank issued a statement just hours after ministers struck a deal in Brussels to rework the rules of the EU Stability and Growth Pact following repeated breaches of its deficit limits by Germany, France and others.
"The Governing Council of the ECB is seriously concerned about the proposed changes to the Stability and Growth Pact," said the ECB, which is independent and sets interest rates for the entire 12-nation euro area.
"It must be avoided that changes in the corrective arm undermine confidence in the fiscal framework of the European Union and the sustainability of public finances in the euro area member states," it said.
Markets, worried more flexible fiscal rules for governments would pressure the ECB to raise interest rates, pushed 2-year eurozone government bond yields up sharply.
The euro came under pressure, though an expected US interest rate hike this week also hung over trading. Adding to market nerves on rates were ECB Governing Council member Yves Mersch's comments that a negative market reaction to the pact's rejig would weigh on the ECB's monetary policy decisions.
Germany's Bundesbank also said it was "very serious that the framework conditions for the common European monetary policy could be worsened" and described the new rules as "less transparent, more complicated and more difficult to implement".
The agreement to let countries run bigger shortfalls without automatic sanctions was a relief to euro zone heavyweights Germany and France, which have breached the EU deficit ceiling three years in a row and want more leeway to boost limp growth.
The deal offered something for everyone, promising special consideration for extra spending on development aid, public investment, R&D and innovation, pension reforms and by implication on defence and peacekeeping.
In a concession to EU newcomers such as Poland and Hungary, countries where pension reform raises the public deficit will enjoy a 5-year grace period to absorb the costs, a concession that will make it easier for them to join the euro.