Oct. 13 (Bloomberg) -- France is balking at calls for the faster imposition of sanctions on deficit-ridden governments, putting it at odds with Germany and the European Central Bank over how to prevent a repeat of the debt crisis.
In a replay of debates over European economic management in the 1990s, France insisted on leaving sanctions in the hands of elected national officials, while Germany and the ECB want to make them virtually automatic, said four people with knowledge of discussions yesterday among officials in Brussels.
The French-German impasse sets up a confrontation when EU finance ministers consider European Commission proposals to fix budget management at an Oct. 18 meeting in Luxembourg. The gathering comes as the euro gains and bond yields in Greece and Spain slip from highs reached during the debt turmoil, lessening the pressure to overhaul the economy’s governing system.
“The French have not understood what time it is,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The last 10 years have shown that if you really put it all in the hands of the politicians, it’s not going to work. There’s too much horse trading.”
No country has been fined in the euro’s almost 12-year history for overstepping the deficit limit of 3 percent of gross domestic product. Greece, the trigger of this year’s debt shock, went the whole period with a deficit over the threshold.
The euro has rallied after reaching a four-year low of $1.1876 on June 7. It traded at $1.3982 at 12:35 p.m. Brussels time. The euro is 19 percent overvalued, a Bloomberg index of the relative buying power of world currencies shows.
The currency, shared by 16 nations, faces “a real challenge,” billionaire Warren Buffett said yesterday in remarks recorded for a conference in Israel. “This is a test, and I would say the test has not yet been passed. I’d rather watch it from afar than nearby.”
“Quasi-automatic” sanctions are at the heart of the EU economic-management proposals. They would require high-deficit countries to marshal a majority of euro-area allies to head off financial penalties.
ECB President Jean-Claude Trichet endorsed that policy, telling the Economic Club of New York yesterday that “we need quasi-automaticity in the application of sanctions, based on clearly defined criteria and with less discretion over outcomes.”
Fines would go as high as 0.2 percent of GDP for flouting fiscal targets and 0.1 percent of GDP for running “excessive” macroeconomic imbalances such as outsized current account deficits, under proposals that require EU government approval.
France, with Italy’s backing, wants to stick with the current system of putting any sanctions to a vote among euro-area governments. French Finance Minister Christine Lagarde said Sept. 27 that “political powers must remain in the game.” A German position paper the same day called for the “application of sanctions on a quasi-automatic basis.”
Stiffer sanctions aren’t the best solution because would spark resistance to EU authorities at national level, said Alessandro Leipold, a former International Monetary Fund official.
“There is a problem with the heavy emphasis on sanctions,” said Leipold, who advises the Brussels-based Lisbon Council research institute. “If you’re relying solely on Brussels-imposed sanctions, at the end of the day you’re really tearing at the fabric of EU solidarity and feeding into the euroskeptics.”
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