EU executive still wants tougher debt rules

ROBERT WIELAARD - Associated Press Writer
Luxembourg's Finance Minister Jean Claude Juncker speaks during a media conference after a meeting of eurogroup finance ministers at the Kiem Center in Luxembourg on Monday, Oct. 18, 2010. European finance ministers plan to hash out a deal on stricter budget rules to avoid another government debt crisis, as a surging euro casts doubt on the continent's fragile economic recovery. (AP Photo/Virginia Mayo)
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Luxembourg's Finance Minister Jean Claude Juncker speaks during a media conference after a meeting of eurogroup finance ministers at the Kiem Center in Luxembourg on Monday, Oct. 18, 2010. European finance ministers plan to hash out a deal on stricter budget rules to avoid another government debt crisis, as a surging euro casts doubt on the continent's fragile economic recovery.

The EU executive commission said Tuesday it will still push for automatic fines to be levied on governments who flout euro spending rules — even though a French-German deal containing less drastic enforcement has won broad backing from elected governments.

Olivier Bailly, spokesman for the European Commission, which sought automatic sanctions for overspenders under a draft economic governance package, said "our work remains on the table."

The comment suggested the EU's executive body hopes to convince the European Parliament to revive its automatic proposal when it approves tougher eurozone rules by next summer at the latest.

On Monday the EU finance ministers backed a tighter budget rules, including fines for violators of the euro's deficit and debt ceilings — of 3 percent and 60 percent of GDP, respectively. Germany dropped its long-held insistence they be automatic — imposed unless governments vote against them. The Germans made a concession to France, which wanted governments to impose fines, not EU bureaucrats.

The new rules are an attempt to strengthen an earlier pact that also called for heavy fines. The problem was, leaders could never muster the will to impose them on fellow governments when several of them, including France and Germany, broke the limits.

Controlling deficits —which can undermine the euro — took on new urgency when Greece almost went bankrupt in May, leading to speculation the currency union itself might break up.

Under the deal, governments must vote to start proceedings against deficit sinners if they are deemed in danger of breaking the limits. After that, the penalties take effect unless governments reverse themselves and vote them down.

That compromise at first rankled eurozone hard-liners the Netherlands, Sweden, Slovakia and Finland but by Tuesday their officials sounded resigned to the deal.

"This was something of a compromise and I am very satisfied with it," said Finnish Finance Minister Jyrki Katainen.

"Now we have better sanctions, more sanctions and I am very satisfied."

Dutch Finance Minister Jan Kees de Jager — hiding his initial dismay that fines were no longer automatic — called the Franco-German compromise the "biggest step forward since the launch of the euro" as a common European currency in 2002.

The stricter budget rules for 16 eurozone members will likely be endorsed next week by the EU leaders who look back on a year of crisis, with ballooning deficits and debts in Greece, Portugal, Spain and Ireland. The EU has had to put up more than 100 billion euros ($140 billion dollars) to bail out Greece.

While Greece has been the focus of Europe's woes, the EU currently has investigations into the overspending practices of 15 of the 16 eurozone nations.

The beefed up budget rules would significantly boost EU oversight of national spending although details still to be worked out:

— The European Commission gets to monitor national spending priorities, will issue annual country reports using economic indicators that must still be defined.

— National deficits, including those below 3 percent of GDP, must drop or offenders get six months to get finances back in order.

— If that doesn't work, there'll be fines. Governments may be told to put up interest-bearing deposits. Next, they may lose the interest and then the deposit. The exact fine amounts must still be fixed. EU officials have suggested amounts equal to 0.2 percent of GDP.

— Increasingly, indebtedness will trigger sanctions, but exact criteria to reduce debt levels remain under discussion. Public debts in eurozone nations now average 85 percent, up from 65 percent a few years back.

The new budgetary rules will parallel another Franco-German initiative: a permanent crisis insolvency mechanism, involving sacrifices by private creditors, for countries that drown in debt.