Brussels eyes tougher fiscal discipline

The European Commission on Wednesday proposed tougher rules to enforce fiscal discipline in the eurozone and to set up a permanent crisis management mechanism to prevent sovereign debt disasters.

The initiatives, if approved by national governments, would represent the most significant advance in eurozone economic governance since the euro’s launch in 1999.

They were prompted by a debt crisis that erupted last October in Greece, spread across world financial markets and resulted on Monday in the creation of an emergency international €750bn facility to protect eurozone governments in severe difficulties.

“We must show we are serious about the more fundamental reforms that are needed. We must now get to the root of the problem,” José Manuel Barroso, Commission president, told reporters.

The €750bn stabilisation fund is designed to last only three years, and Mr Barroso said the latest initiatives showed that the EU was moving beyond ad hoc solutions to the euro area’s problems.

Among the most important proposals is the idea that national governments should assess each other’s annual budgets in greater detail and much earlier than is now the case. While they would not have the power to force a country to rewrite its budget, they would be able to exert pressure to make the budget’s assumptions about economic growth, inflation and interest rates as realistic as possible.

The European Union’s fiscal rulebook, known as the stability and growth pact, would be tightened so that more emphasis was placed on the need for governments to cut public debt.

For example, any country with a debt of about 100 per cent of gross domestic product would be told to keep its annual budget deficit not just below 3 per cent of GDP but so far below that it produced a steady reduction in the debt level.

Greece and Italy have debts far above 100 per cent of GDP, and the 16-nation eurozone’s average debt is expected to rise to 88.5 per cent of GDP next year – far above the 60 per cent level envisaged in EU treaties as the upper limit for qualification for eurozone entry.

Olli Rehn, the EU’s monetary affairs commissioner, acknowledged that the stability pact, drawn up at German insistence in the mid-1990s, had fallen short of expectations.

“Peer pressure lacked teeth. Good times were not used for reducing debt. And macroeconomic imbalances were ignored,” Mr Rehn said.

Financial markets want to see the eurozone’s most vulnerable countries introduce rapid measures aimed at controlling debts and deficits, but they are also keen to see an explanation from EU authorities about how they propose to generate economic growth so that the eurozone does not lapse into a decade of deflation.

The Commission’s proposed crisis management mechanism would build on the emergency arrangements set up last weekend by including an unambiguous provision that no country could draw loans from its partners unless it committed itself to a rigorous effort at cleaning up its public finances.

The details of the new mechanism remain to be fleshed out, but Mr Rehn said it would be “a last-resort mechanism of financial assistance in the form of loans, with interest rates that would be so unattractive that no one would want to use it voluntarily”.

The lesson from the Greek crisis, Mr Rehn went on, was that “it’s better to be safe than sorry and prepare for worst-case scenarios”.