The European Commission set out proposals for better enforcement of EU budget rules today that would give Brussels greater power to make member states reduce high debt levels and reward low-debt countries.
Commission President Mr Romano Prodi said the plan aimed to inject greater intelligence, flexibility and authority in the way the European Union applies its limit on budget deficits.
The proposal would take account of the whole economic cycle to set budget objectives and give more leeway for countries that have low debt to borrow to finance investment or reforms.
But the plan is to take a stricter line with countries which are not making enough progress in cutting debt. Tardiness in cutting debt would trigger a discipline action whose ultimate sanction is a fine and which has so far only been applied to deficits.
"Failure to achieve a satisfactory pace of debt reduction towards the 60 percent of GDP reference value should result in the activation of the debt criterion of the excessive deficit procedure," the Commission said.
EU Monetary Affairs Commissioner Mr Pedro Solbes said high-debt countries should ideally cut their debt-to-GDP ratio by about three to four percentage points per year.
Mr Prodi said the plan would be submitted to finance ministers but a spokesman for Mr Solbes said the EU executive did not need member states' backing to start applying disciplinary procedures to debt and would proceed whatever member states said. In its report, the Commission highlighted the difficulties it has faced in implementing the pact.
Countries which breach the deficit cap of three per cent of gross domestic product, as Portugal did in 2001 and Germany is expected to do this year, trigger disciplinary action whose ultimate sanction is a fine. But member states rejected a Commission proposal earlier this year to send "early warnings" to both countries under strong German political pressure.
States that have failed to reduce high debt, such as Italy, have been urged repeatedly by the Commission to take steps to cut their debt but have so far escaped official rebuke.
Mr Prodi said the Commission would seek greater powers, in proposals to be submitted next week to the Convention drafting a future EU constitution, to discipline countries that overspend in good times and fail to curb their deficits in downturns.
The new measures would remove interpretations that have enabled some states to adopt lax fiscal policies and fail to prepare in good times for the challenges of economic downturns.
Mr Prodi said EU leaders would be asked to reaffirm their commitment to the Stability and Growth Pact at a summit in Brussels next March, and the new measures for disciplining excessive debt should be approved before then.