Europe gets 'cold feet' over debt clampdown

18th October 2010, Comments 0 comments

European Union President Herman Van Rompuy's bid to hammer states that run up huge debts wilted on Monday as governments got "cold feet" in the face of radical new sanctions.

Poland mounted staunch resistance and even Germany "softened" its hard line, diplomats said, leaving EU promises of tough action looking empty -- "no different from where we were in 2003," as one Brussels source put it bluntly.

Dutch Finance Minister Jan Kees de Jager said states -- led by Italy, with one of the world's highest public debt ratios, and France, simultaneously presenting new budget plans to its parliament -- had cooled on ideas aimed initially at the soon-to-be 17 euro currency countries.

The bloc currently comprises 16 members.

Polish minister Jacek Rostowski made it crystal clear that the "only circumstances" under which penalties, including fines, would be acceptable there would be for pension reform costs linked to bloc accession to be stripped out of EU calculations.

Poland has yet to enter the eurozone.

"A lot of states are getting cold feet now," de Jager said as Van Rompuy's "task force" on economic governance met for the sixth time to settle recommendations for national leaders to mull at a summit next week.

Van Rompuy was charged by national leaders earlier this year with drawing up plans to strengthen pan-European economic governance.

EU Economic Affairs Commissioner Olli Rehn said finance ministers meeting in Luxembourg faced a "litmus test" that would show "whether states are genuinely for reinforced economic governance or not."

"Now is the moment of truth," he stressed.

Europe issued a flood of rhetoric in the spring about tightening budgetary discipline in a broadly successful bid to calm markets that had been showing signs of panic over the spread of the Greek debt crisis.

But the subsequent fall of the dollar and sterling and talk of a currency "war" with China, which has pushed up European export costs and threatens tentative recovery, has weakened enthusiasm for strengthening cross-border EU powers.

Draft task force conclusions said "specific attention should be paid to the impact of pension reforms," in a nod to Poland, and noted Italy wanted "private debt" levels considered.

Non-public debt in Italy is relatively small compared to Britain or Ireland.

Crucially, the task force left it to national politicians to determine how fast to whack transgressors by rejecting novel voting procedures designed to make it harder for big states to evade ground rules.

The deal was done when Germany backed down on how many "chances" states would get before automatic penalties kick in, a top diplomat said.

Rehn wanted countries that overstep a debt threshold of 60 percent of gross domestic product to adhere to strict reduction targets.

But rejoinders including exchange rates and debt maturity classification were each factored in.

Early ideas for voting rights to be withdrawn fell quickly, as did talk of freezing EU payments to support farming, a major problem for France.

Diplomats also warned that a threat to withhold aid for poorer regions, vehemently opposed by Poland, could not be considered before 2013 owing to bloc commitments made to newer members.

Rehn's commission will come back around the end of the year with proposals resurrecting such "second-stage" sanctions to be applied to the remaining non-euro EU nations as well-- except Britain, which successfully presented itself as a special case, based on treaty opt-outs.

When the euro was being created in the late 1990s, Germany proposed automatic, dissuasive and severe fines, but France successfully unpicked these demands.

European Central Bank president Jean-Claude Trichet himself warned at the weekend that "more ambitious reforms are needed."

© 2010 AFP

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