ECB, Germany back sanctions for EU budget sinners

27th September 2010, Comments 0 comments

The European Central Bank and Germany threw their weight on Monday behind proposals to impose sanctions on European Union governments that repeatedly break budget rules.

The calls came as trade unions prepared to lead demonstrations in Brussels and other parts of Europe on Wednesday against austerity measures launched by EU states to bring down huge public deficits.

ECB chief Jean-Claude Trichet warned of a constant "under-assessment" of budget problems by EU states and called for the creation of an advisory board of "wise men and women" to keep an eye on fiscal discipline.

Trichet also joined Germany in backing European Commission proposals to impose "quasi-automatic" fines on countries that fail to keep their deficit and debt levels under EU limits.

"Indeed, a core, absolutely indispensable, element of an effective surveillance mechanism is a functioning mechanism of incentives and sanctions -- both financial and non-financial," he told the EU parliament's economic affairs committee.

Trichet and Germany laid out their positions ahead of a meeting of EU finance ministers in Brussels as part of a task force led by EU President Herman Van Rompuy to strengthen the 27-nation bloc's fiscal discipline.

In a letter to his EU counterparts, German Finance Minister Wolfgang Schaeuble said he "chiefly supports" tough sanctions to be proposed by the European Commission on Wednesday.

Schaeuble backed measures to give the EU's Stability and Growth Pact "more bite" by speeding up the penalty process and imposing quasi-automatic sanctions.

Nearly every EU state exceeds the pact's public deficit limit of 3.0 percent of GDP but the path towards penalties is long and the bloc has never imposed sanctions against any state.

Pressure to tighten EU rules rose after a massive fiscal crisis in Greece forced the eurozone to bail out Athens in May and led to the creation of a trillion-dollar war chest to prop up any other weak member state.

The Greek debt crisis was followed by a wave of austerity measures across Europe, which has caused social discontent. Despite the unrest, Brussels wants to twist the arms of states that fail to curtail spending.

European Economic Affairs Commissioner Olli Rehn wants the sanctions to kick in quasi-automatically, with penalties only avoided if a majority vote against.

One proposal being considered by the commission would force rule breakers to deposit the equivalent of 0.2 percent of their gross domestic product, an amount that would become a fine if corrective measures were not taken, EU sources said.

Another measure would punish countries that surpass the EU's debt ceiling of 60 percent of GDP by forcing them to slash the excess by five percent each year for three years.

The commission also wants to smooth out cross-border imbalances, with sources talking of possible fines running to 0.1 percent of GDP for countries that fail to meet targets aimed at bringing them into line.

In his letter and a position paper, Schaeuble called for the suspension of voting rights and the freezing of EU development and farm aid funds for countries that fail to respect the rules.

"The creation of stronger incentives to prevent and correct excessive government deficits stands at the very core of our endeavours to enforce fiscal and economy governance in the EU," he wrote.

Set up by national leaders, the Van Rompuy task force is due to present its own findings at a summit next month.

The panel has struggled on sanctions so far, with ideas for cutting future aid for poorer regions hitting opposition, notably among ex-Communist eastern European states.

© 2010 AFP

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