EU budget shake-up plan includes fines

Wednesday 29 September 2010 14.14
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EU Commission - New economic governance package
EU Commission - New economic governance package
Brussels - Europe-wide austerity protests today
Brussels - Europe-wide austerity protests today

Euro zone countries that stubbornly break the European Commissions' deficit and debt rules could face big fines under legislation proposed today to prevent a new crisis in the single currency area.

The European Commission unveiled new proposals to revamp the Stability and Growth Pact, which sets out limits on deficit and debt levels but failed to prevent the debt crisis in Greece that rocked the euro this year.

The changes will see the Stability and Growth Pact becoming more rules based and sanctions will be the normal consequence to expect for countries in breach of those rules.

A statement from the European Commission said that after the complacency of the good economic times, the monitoring of public finances will now be based on the new concept of 'prudent fiscal policy making'. The Commission says it may issue a warning in case of a major deviation from such policies.

The Stability and Growth Pact Regulations will now follow debt developments more closely and debt will be put on an equal footing with deficit developments. Member states whose debts are more than 60% of GDP should take steps to reduce it at a satisfactory pace.

The Commission is also bringing in a new set of gradual financial sanctions for euro area countries. States face an interest-bearing deposit should they make significant moves from prudent fiscal policy decisions, while a non-interest bearing deposit would have to be paid if they have an excessive deficit.

'This would be converted into a fine in the event of non-compliance with the recommendation to correct the excessive deficit,' the Commission said.

The EU is also introducing an 'Excessive Imbalance Procedure' which will see the Commission undertake regular assessment of the risks of imbalances based on data from economic indicators. The Commission may launch in-depth reviews for countries at risk that will identify the underlying problems.

'For member states with severe imbalances or imbalances that put at risk the functioning of the European Monetary Union, the Council may adopt recommendations and open an excessive imbalance procedure (EIP)', the statement said.

If a member state repeatedly fails to act on EIP recommendations to address excessive imbalances, it will have to pay a yearly fine equal to 0.1% of its GDP.

The Commission says that all the reforms should ensure that the EU and the euro zone area benefit from more effective economic policy co-ordination.

'That should give the EU and the euro area the necessary capacity and strength to conduct sound economic policies, thereby contributing to more sustainable growth and jobs, in line with the Europe 2020 strategy,' the Commission added.

Pressure to tighten the rules rose after a massive fiscal crisis in Greece forced the euro zone to bail out Athens in May and led to the creation of a €750 billion war chest to prop up any other weak member state.

Brussels unveiled its proposals on the same day that trade unions organised anti-austerity demonstrations in the Belgian capital and other parts of Europe.

More on the austerity protests across Europe here

Nearly every European state exceeds the pact's public deficit limit of 3% of GDP but the path towards penalties is long and the bloc has never imposed sanctions against any state.

To ensure that states follow prudent fiscal policies, the commission proposed today that annual public spending should not exceed GDP growth.

The proposals need to be approved by EU states and the European parliament.