European Central Bank Vice President Vitor Constancio said governments must “significantly” toughen budget rules and remove the leeway for nations to use loopholes to avoid penalties.
“There’s a need to enhance significantly the enforcement procedures for fiscal discipline,” Constancio said at a conference in Paris today. This “should include in particular the quasi-automatic application of sanctions on the basis of clearly defined criteria and without scope for discretion through ‘exceptional circumstances’ or waivers.”
European leaders are seeking ways to tighten budget-deficit rules and contain the region’s debt crisis as governments from Spain to Italy struggle to restore investor confidence. Ireland last month became the second euro nation after Greece to seek external assistance after surging costs to rescue the country’s banking system pushed up its deficit.
Countries that breach the European Union’s debt and deficit limits can be subject to economic sanctions, though none has been fined so far. EU members overhauled the fiscal rules in 2005, easing penalties for deficit overruns.
European finance ministers yesterday ruled out immediate aid for Portugal and Spain and said the region’s 750 billion-euro ($1 trillion) crisis fund is sufficient. Luxembourg Prime Minister Jean-Claude Juncker, who chaired a meeting of ministers in Brussels, told Bloomberg News that leaders will “do everything to secure” financial stability in the 16-member region.
“There will always be a risk that prevention will fail and that countries will be confronted with debt crises,” Constancio said. “In such circumstances, it’s essential to have in place a predictable framework for managing crises that contributes both to financial stability and the correct pricing of risk.”
He also said that a “good start” has been achieved on reforms of the international monetary framework and a “more cooperative system of exchange-rate regimes is essential.”
“However, I do not see a major reform of the international monetary system on the horizon, as there is no real substitute for the U.S. dollar in medium term,” he said