EU reaches draft deal on tougher budget rules

The European Union reached a deal on Friday to toughen its budget rules, in a bid to restore some market confidence in euro zone public finances and prevent another sovereign debt crisis. The new rules would apply mainly to the 17 countries sharing the euro, whose debt markets have in their sights after Greece, Ireland and Portugal had to seek emergency funding from international lenders because of bloated accounts.
"We are able to announce that we have reached a compromise regarding the package of six acts that will create the basis for future governance in the European Union," Polish Finance minister Jacek Rostowski, whose country holds the rotating presidency of the EU, told a news conference. "Agreement on all points of disagreement has been definitively reached and this is why we a have a significant certainty that these acts will be passed," Rostowski said.
The agreement, reached between the European Parliament and EU governments, will make it easier to quickly impose financial sanctions on countries disobeying the rules and scrutinise more thoroughly the economies of the 27-nation bloc. The EU began a review of the current rules, which limit budget deficits at 3 percent of GDP and public debt at 60 percent, in the first half of 2010.
The European Commission presented six legislative proposals, nicknamed "the six-pack," last September. Haggling over how easily financial sanctions should be imposed on euro zone countries breaking the rules has led to the debate dragging on until now.
The delay was caused mainly by a Franco-German deal in October 2010 to insert more political discretion into imposing sanctions on rule breakers, weakening the Commission's initial idea which was to make sanctions almost automatic. Pressure from markets, hungry for signals the euro zone is capable of making fiscal policies sustainable, helped a deal.
PREVENTION BETTER THAN CURE "This package is especially important because it translates one of the lessons of the current crisis into concrete action. Prevention is always better and cheaper than correction," Economic and Monetary Affairs Commissioner Olli Rehn said.
"It provides instruments to ... correct macroeconomic imbalances which were behind the crisis, for example, in Ireland. It is an extremely important reform by creating the foundation for further steps in deeper economic integration," he said. The deal will have to be formally voted on by the European Parliament on September 26 and then accepted by an EU council of national ministers in early October. It is likely to formally become law in November.
The deal gives teeth to the existing - but not observed - EU rule that countries should not only not run budget deficits, but should seek budget balance or a surplus. Now those who ignore the balanced budget goal may face financial sanctions if the European Commission, the EU executive arm, issues a warning that the country is straying from the right fiscal path.
Such a warning would have to be approved by euro zone finance ministers in a vote backed by a qualified majority of countries. In qualified majority voting until the end of October 2014, each EU country has a number of votes assigned by the Treaty of Nice. To pass, a motion has to get 74 percent of votes.
If the ministers reject the warning, or ignore it, the Commission can issue another warning a month later and sanctions would follow unless the ministers again vote it down, this time by simple majority. This would mean that nine out of the 17 euro zone countries would have to be against issuing such a warning.
Despite the simple majority required the second time to again scrap the motion, parliamentary sources believe it would be very difficult politically for the ministers to turn down a recommendation from the Commission twice. Parliament will also be able to ask the finance minister of the country receiving the warning to explain his policies before the EU Parliament's economic committee.
Similarly, financial sanctions would be imposed on those who did not try to reduce their public debt to the EU-accepted limit of 60 percent of GDP. More financial penalties would swiftly await those who run budget deficits higher than 3 percent of GDP and those who fail to address major imbalances in their economies despite warnings from the Commission and other euro zone members.
The Commission would monitor the economies of euro zone countries to detect any macroeconomic imbalances that could become a problem for the wider euro zone. In assessing if a country has macroeconomic imbalances the Commission would look at countries that have large current account deficits, but also large current account surpluses - although the latter would likely be treated with more leniency.