EU Leaves Euro Deficit Penalties in Political Hands
European governments left decisions to sanction euro-area budget violators in political hands, stopping short of the more automatic crackdown on runaway deficits demanded by the European Central Bank.
Germany, which had pushed for “quasi-automatic” sanctions and threatened to expel chronic high-deficit countries from the euro region, shifted its stance yesterday to embrace French calls to require at least two votes by euro-area governments before penalties are imposed.
“European politicians have forgone a historic opportunity to reform the fiscal framework in one fell swoop,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The German- French compromise could eventually still deliver a decent framework in the future, but for the time being we only got a piecemeal reform, vulnerable to further watering down.”
As the euro rises and bond yields in Greece and Spain slip from highs reached after the debt shock earlier this year, pressure to fix the management of the $12 trillion economy has eased, weakening the drive by Germany and ECB President Jean- Claude Trichet for tougher enforcement of fiscal rules.
“I’m a little bit surprised that we did not have the full 100 percent backing for fiscal discipline from Germany,” Swedish Finance Minister Anders Borg told reporters on the second day of the European Union meetings in Luxembourg. “We could have reached a little bit further but we have made so much progress.”
No country has been fined in the euro’s almost 12-year history for overstepping the EU’s deficit limit of 3 percent of gross domestic product. Greece, the trigger of this year’s debt crisis, went the whole period with a deficit over the threshold.
Germany said the new system will put high-deficit nations on a tighter leash by setting a six-month deadline for them to take austerity steps or face financial penalties as high as 0.2 percent of GDP.
Sanctions will come “earlier, sharper and faster,” German Deputy Finance Minister Steffen Kampeter told reporters today in Berlin.
The appraisal echoed the German line after the original rules were negotiated in 1996. Theo Waigel, then German finance minister and the main architect of the stability pact, hailed it at the time as a “quasi-automatic process” which “shifts the burden of proof” to deficit-plagued countries.
That system broke down in 2003, when Germany and France used their muscle as the euro area’s two largest economies to head off penalties for three consecutive breaches of the limit.
Yesterday’s accord goes to EU government leaders on Oct. 28-29, then back to finance ministers for debate on the precise legal language. The final legislation also requires the approval of the European Parliament so the new rulebook can take effect by mid-2011.
Key details remained up for negotiation after the 11-hour meeting, including pre-emptive penalties on countries before deficits go over the limit, the size of annual reductions demanded of nations above the debt limit of 60 percent of GDP and how to punish countries with “excessive” macroeconomic imbalances such as outsized current-account gaps.
The unpublished final accord, obtained by Bloomberg News, spoke only of “sanctions” for “repeated non-compliance” with EU demands to redress imbalances, without specifying fines.
“This is an improvement compared with what we have today, but we don’t live in an ideal world,” Luxembourg Finance Minister Luc Frieden said.
In an echo of the debate before the euro’s launch in 1999, the ECB -- without a vote on the reshaping of the rules -- made the case for the crackdown on countries with lax budgets.
“More ambitious reforms are needed,” Trichet said on Oct. 16 in Marrakech. He lobbied for “greater automaticity, accelerated timelines and reduced room for discretion in procedures.”
As with the rules that failed to prevent Greece from veering toward default, the new system would require a majority of euro-area governments to first declare a country’s deficit “excessive” and, six months later, to rule that it failed to start fixing the problem.
Only after the second vote would the German-touted “quasi- automatic” feature of the system kick in, enabling the European Commission to impose sanctions unless a majority says no.
French Finance Minister Christine Lagarde welcomed the rejection of a “more mechanical” process, saying “the member states are the main actors.”
Stuck with the biggest bill for the 860 billion euros ($1.2 trillion) in loans and pledges to stabilize the euro this year, Germany has since reverted to its pre-euro insistence on uncompromising budget discipline as the pillar of an inflation- proof currency.
Finance Minister Wolfgang Schaeuble -- absent from the Luxembourg meetings for health reasons -- even floated the prospect of expelling repeat offenders from the currency union, a demand since dropped.
German Chancellor Angela Merkel billed the sanctions as “automatic” even though they are subject to a political vote, in a joint statement with French President Nicolas Sarkozy after a separate get-together in Deauville, France.
Sarkozy backed Merkel’s call for a rewrite of EU treaties by 2013 to create a permanent crisis-resolution mechanism and to include the denial of EU voting rights in the sanctions package. Britain immediately objected to another treaty overhaul, which would require unanimous assent of all 27 EU governments.
“Disagreements and tensions over the proposed reform of economic governance will inevitably confirm concerns that, whatever new rules are agreed, they will be as unenforceable as the old ones,” said Marco Annunziata, chief economist at UniCredit Group in London.
The euro has rallied after reaching a four-year low of $1.1877 on June 7 and traded at $1.3819 at 4:15 p.m. Luxembourg time. The euro is 19 percent overvalued, a Bloomberg index of the relative buying power of world currencies shows.
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