Tags: EU | Euro | Sanctions

EU Builds Political Check Into Euro Sanctions in Blow to ECB

Monday, 18 October 2010 03:48 PM

European governments left decisions to sanction euro-area budget violators in political hands, stopping short of the more automatic crackdown on runaway deficits demanded by the European Central Bank.

Germany, which had pushed for “quasi-automatic” sanctions and threatened to expel chronic high-deficit countries from the euro region, today abandoned allies including the Netherlands and embraced French calls to maintain a layer of political decision-making before sanctions are imposed.

“It was a considerable fight and a lengthy fight,” Dutch Finance Minister Jan Kees de Jager told reporters after the European Union meeting in Luxembourg tonight. “You always want to go further: more automatic, more independent.”

As the euro rises and bond yields in Greece and Spain slip from highs hit after the debt shock earlier this year, pressure to fix the management of the $12 trillion economy has eased, undermining pleas by Germany and ECB President Jean-Claude Trichet for tougher enforcement of fiscal rules.

No country has been fined in the euro’s almost 12-year history for overstepping the EU’s deficit limit of 3 percent of gross domestic product. Greece, the trigger of this year’s debt crisis, went the whole period with a deficit over the threshold.


Germany said the new system will put high-deficit countries on a tighter leash by setting a six-month deadline for them to take austerity steps or face financial penalties as high as 0.2 percent of GDP.

Penalties will “come earlier, meaning there will already be sanctions under the preventive arm of the pact, which is not the case today,” German Deputy Finance Minister Joerg Asmussen said. “They come faster” and “they will also be more stringent.”

Key details remained hazy after the 11-hour meeting, including the size of the majorities needed to impose sanctions for excessive deficits, the penalties on countries above the debt limit of 60 percent of GDP and whether fines would be slapped on countries with “excessive” macroeconomic imbalances such as outsized current-account deficits.

“Look at the whole picture: it’s a massive strengthening of the pact,” French Finance Minister Christine Lagarde said.

Today’s accord goes to EU government leaders on Oct. 28-29, then back to finance ministers for debate on the precise legal language. The final legislation also requires the approval of the European Parliament.

Economic Muscle

As with the rules that failed to prevent Greece from veering toward default, the new system would require a majority of euro-area governments to declare a country’s deficit-cutting efforts inadequate before moving toward sanctions.

Such a system broke down in 2003, when Germany and France used their muscle as the euro area’s two largest economies to head off sanctions for three consecutive breaches of the limit.

Stuck with the biggest bill for the 860 billion euros ($1.2 trillion) in loans and pledges to stabilize the euro this year, Germany has since reverted to its pre-euro insistence on uncompromising budget discipline as the pillar of an inflation- proof currency.

Finance Minister Wolfgang Schaeuble -- absent from today’s meeting for health reasons -- even floated the prospect of expelling repeat offenders from the currency union, a demand since dropped.

German Chancellor Angela Merkel touted the sanctions as both “automatic” and subject to a political vote, in a joint statement with French President Nicolas Sarkozy after a separate get-together in Deauville, France.

Crisis Resolution

Sarkozy backed Merkel’s call for a rewrite of EU treaties by 2013 to create a permanent crisis-resolution mechanism and to include the denial of EU voting rights in the sanctions package. Britain immediately objected to another treaty overhaul, which would require unanimous assent of all 27 EU governments.

The euro has rallied after reaching a four-year low of $1.1877 on June 7 and traded at $1.3982 today. The euro is 20 percent overvalued, a Bloomberg index of the relative buying power of world currencies shows.

In an echo of the debate before the euro’s launch in 1999, the ECB -- without a vote on the reshaping of the rules -- made the case for the crackdown on countries with lax budgets.

“More ambitious reforms are needed,” Trichet said on Oct. 16 in Marrakech. He lobbied for “greater automaticity, accelerated timelines and reduced room for discretion in procedures.”

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European governments left decisions to sanction euro-area budget violators in political hands, stopping short of the more automatic crackdown on runaway deficits demanded by the European Central Bank.Germany, which had pushed for quasi-automatic sanctions and threatened...
Monday, 18 October 2010 03:48 PM
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