September 23, 2010 11:14 pm

Big spenders face EU fines

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At the height of the Greek debt crisis, Olli Rehn, the European commissioner for economic and mon­etary affairs, was applauded when he vowed to put “more teeth” into long-flouted rules intended to prevent members from piling up unsustainable debts.

But five months of tortured debate have exposed the challenges of translating those words into policy. The effort has been undermined by competing national priorities, as well as legal and accounting complexities.

As a result, Mr Rehn’s new proposals, obtained by the Financial Times but formally unveiled next week, will be just the latest word in an argument that could get even more heated before it is resolved.

“It’s very difficult to envisage a solution that fits all of the member states,” said one European ­diplomat.

Adding to the complexity of the exercise is a bit of Brussels institutional rivalry. Alongside Mr Rehn and the Commission, which has the authority to propose new legislation, a separate taskforce led by Herman Van Rompuy, the president of the European Council of member states, which must approve any proposals, has been carrying out its own review.

Gross government debt

By Council fiat, Mr Van Rompuy’s group was put in the driver’s seat. Yet there is frustration in Paris as well as other capitals at the taskforce’s lack of progress and the rivalry with the Commission.

At a meeting of finance ministers this month, Mr Van Rompuy presented his latest set of proposals without having first circulated them to national officials. Ministers were unable to agree his plans. “It was not his finest moment” said another European Union diplomat.

While the overlapping efforts have found some consensus, there are still plenty of unresolved issues. A central debate, dividing the EU’s Franco-German axis, is whether the rules should apply to all 27 member states or only the 16 members that use the euro currency.

The Germans believe the rules should apply widely so that the EU does not become a two-tier club. But Mr Rehn is constrained in his ability to propose measures beyond the eurozone. Doing so, as the French have pointed out, would require a reopening of the Lisbon treaty – an arduous process that few governments other than Germany appear willing to stomach. The UK in particular is strongly opposed.

There is also stubborn division over how to punish wayward EU members. Mr Rehn will propose penalties of up to 0.2 per cent of GDP for habitual debt offenders. A smaller fine of 0.1 per cent could also apply to members that fail to correct persistent macroeconomic imbalances.

By contrast, the member states – who are in the awkward position of designing rules to punish themselves – have yet to reach a consensus on sanctions.

Some remain opposed to the idea of financial sanctions altogether, arguing that it would only add to the burden of already struggling governments.

Even before penalties can be assessed, the discussions have foundered on the technical question of how debt should be measured. For the sake of simplicity and transparency, some member states, such as the Netherlands, want the metric to be public debt.

Pension liabilities have also complicated the debate. Poland, for example, took on extra public debt as a result of reform to its pay-as-you-go pension system in 1999. It is now worried that it will be penalised by the commission for its virtue.

“We are all in favour of strong sanctions but you have to have a level playing field,” said a Polish diplomat. Sweden and a group of eastern European countries have expressed similar qualms.

Compromises are inevitable. But some are already fretting that if Europe continues to delay, it will have squandered the political will to finish the job.

“If we don’t have political agreement on the whole thing at once,” said another diplomat, “it will be very dangerous.”

Additional reporting by Ben Hall in Paris and Quentin Peel in Berlin

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