Olli Rehn, the European commissioner for economic and monetary affairs, wants to give budget rules some teeth. Thierry Roge / Reuters
Olli Rehn, the European commissioner for economic and monetary affairs, wants to give budget rules some teeth. Thierry Roge / Reuters

EU budget rules could upset markets



BERLIN // Europe's attempt to adopt strict new budget rules aimed at preventing a repeat of the euro debt crisis risks ending up in a classic EU fudge that could unsettle markets at a time of growing concern over Ireland's deficit troubles.

France, Italy, Spain, Portugal and Greece have voiced opposition this week to a plan by the EU's executive, the European Commission (EC), for a system that would automatically penalise countries that do not keep their budgets under control. The EC's idea, part of a set of proposals submitted yesterday, makes sense because it would lessen the power of member governments to block penalties against themselves, as has happened repeatedly in recent years.

Until now, the threat of punishment under the Stability and Growth Pact (SGP), the 1997 accord designed to underpin the euro by enforcing fiscal discipline in the bloc, has been about as scary for rule breakers as the prospect of being savaged by a dead sheep. There is simply too much scope for nations to evade fines. Olli Rehn, the European commissioner for economic and monetary affairs, wants to give the pact some teeth to reassure markets the EU can stave off Greek-style debt crises in future without having to resort to huge bailout packages.

He wants a new regime under which fines for excessive deficits are applied automatically unless they are blocked by a qualified majority of EU ministers. At present, penalties are imposed only if a qualified majority votes in favour of them, a sluggish process that is more vulnerable to political influence. France, Europe's second-largest economy after Germany, made plain this week that it will not accept such an automatic procedure. It also opposes Mr Rehn's plan for stiffer penalties on countries whose total debt exceeds the ceiling of 60 per cent of GDP. At present, the SGP is characteristically vague on that point.

France's opposition has pitted it against Germany, whose finance minister Wolfgang Schauble said this week the EU's budget rules should be given "more bite" and should include quasi-automatic sanctions. Other commission proposals are less contentious, such as forcing nations that breach the budget deficit cap of 3 per cent of GDP to enter an "excessive deficit procedure" in which they have to make a non-interest bearing deposit of 0.2 per cent of GDP.

The deposit would be converted into a fine if recommendations for corrective action from EU finance ministers are ignored. The fine could subsequently be increased. The reforms require the approval of national government leaders and of the European Parliament. Mr Rehn hopes they will come into force by December next year. But, given the controversy over key points, there is a big question mark over how effective the reforms will be.

In European capitals, the sense of urgency regarding SGP reform has waned in recent months with the gradual recovery of the single currency and strengthening euro-zone growth in the second quarter. That is dangerous because the debt crisis is far from over and financial markets will be unsettled by any obvious lack of progress. Investors are worried again about the creditworthiness of Spain, Portugal and Ireland, whose bond spreads are widening over German bonds. There is particular concern over Ireland's public finances after Moody's Investors Service cut its ratings on the nationalised lender Anglo Irish Bank.

Even assuming that Europe does manage to craft tough new budget rules, it remains unclear how strictly those rules will be enforced in future. After all, member states will retain their final say on fiscal policy. Consensus and compromise will continue to dictate policy. That is the European way. The European Central Bank is aware of the problem and has already proposed that the bloc's last line of defence against speculators - the €750 billion (Dh3.74 trillion) rescue fund that put the plug on the crisis in May - be converted into a permanent facility. It is currently limited to three years.

With EU politicians wavering in their resolve to impose budget discipline on themselves, the bailout fund may be the only way to keep speculators at bay.