EU finance ministers agreed tougher rules on Tuesday to rein in government borrowing and avoid economic bubbles, seeking to shore up market confidence and to help end the sovereign debt crisis. The ministers backed European Commission proposals to sharpen the 27-nation bloc's budget rules, the Stability and Growth Pact, by introducing financial sanctions for rule-breakers more swiftly and automatically.
"The Council agreed a general approach on a package of measures aimed at strengthening economic governance in the European Union - and more specifically in the euro area - as part of the EU's response to the challenges highlighted by recent turmoil on sovereign debt markets," conclusions of the meeting said.
One of the main points sharpening the rules is to make sanctions for offenders more automatic and less dependent on political horse-trading among European Union finance ministers. After the Commission proposed last September that sanctions should be almost automatic for those who break the rules, France and Germany managed to make it easier to stop the penalties from being applied.
But eurozone leaders agreed on Saturday that a call by the Commission to penalise a country should, as a rule, be followed by ministers, or explained in writing. "The Commission's proposal for imposing a deposit or a fine would be considered adopted unless turned down by the Council via qualified majority," the ministers' conclusions said.
This is likely to make it easier for finance ministers to reach a deal with the European Parliament, which co-decides on the reform and has criticised the Franco-German ideas. Parliament is to present its position on the reform of the EU budget rules in mid-April and its negotiations with ministers are to conclude by mid-year. Now eurozone countries are to face sanctions if they ignore the existing, but toothless, rule that governments should strive towards a budget close to balance or in surplus - what is called the medium-term objective (MTO).
To do that, governments should not spend more every year than the medium-term rate of economic growth. If a country breaks that rule, would have to make an interest-bearing deposit of 0.2 percent of GDP if it ignored a first warning. What the EU calls its excessive deficit procedure against a country with a budget deficit above 3 percent of gross domestic product will now start with that country making a non-interest bearing deposit of 0.2 percent of GDP. Until now the start of the procedure was only a mild political embarrassment for offenders.
The deposit would be converted into a fine if the budget sinner did not mend its ways. So far, sanctions have been an option only at the end of the procedure, which could take years. To put more focus on reducing debt, the ministers agreed that those with public debt-to-GDP ratios above the EU limit of 60 percent of GDP would have to cut it by one twentieth of the excess each year, measured over a period of three years.
If not, the country would be in the excessive deficit procedure with the sanctions that entails. To win the support of Italy and Poland, the debt reduction analysis would include implicit liabilities related to private sector debt, the cost of population ageing and the net cost of pension reforms.
Finally, to minimise the risk of crises triggered by macroeconomic distortions such as the housing bubbles in Ireland or Spain, the Commission proposed that it would seek to detect such emerging imbalances. In the case of severe imbalances, countries would be put into an Excessive Imbalances Procedure entailing recommendations from EU finance ministers on how to reduce the imbalance.
Repeated non-compliance with the recommendations would lead to sanctions for euro zone countries - a yearly fine equal to 0.1 percent of the member state's GDP. The ministers also agreed that money from the fines should go to the European Financial Stability Facility (EFSF) and then to its successor - the European Stabilty Mechanism (ESM). Six EU countries, however, have threatened to withdraw their support for this use of the fines unless their peers concede changes in how national contributions to the ESM are calculated. The six say the current method favours richer countries.