No EU sanction on deficit

Brussels has withdrawn the threat of financial sanction against Malta, citing “significant progress” made to correct the deficit by the end of the year.

The island joins four other EU states deemed to have taken satisfactory measures to reduce their deficits: Belgium, Cyprus, Hungary and Poland.

Olli Rehn, the European Commission’s vice president for economic and monetary affairs, told a press conference in Brussels yesterday that a new set of economic governance rules, that come into force today, have already started to deliver results.

Last month, letters were sent to the five countries warning them to take corrective steps by mid-December if they wanted to avoid sanctions under the new rules.

“I am satisfied to confirm that all these member states have done so,” he said. He added that the “final conclusions” on the matter were expected by mid-January.

Commission sources later told The Times that Mr Rehn was very satisfied with Malta’s latest budgetary commitment to reduce the deficit to 2.3 per cent next year.

In his warning letter sent before the 2012 Budget, Mr Rehn told Malta that according to the last Commission projections, it could still be above the three per cent of GDP deficit threshold next year.

He said this was unacceptable under the Excessive Deficit Procedure.

In a meeting with the Commission following the Budget, Malta had explained it was projecting to cut its deficit to 2.8 per cent of GDP this year and to 2.3 per cent in 2012.

The new governance rules were created before EU leaders agreed over the weekend on a fiscal compact to be implemented next year aimed at instilling further budgetary discipline in member states, particularly those in the eurozone.

But from today, the Commission already has the power to impose financial sanctions on member states that do not abide by deficit and debt rules.

The sanction amounts to a deposit of 0.2 per cent of a country’s GDP, which can be turned into a fine if the member state continues to ignore Brussels and EU Council recommendations to rein in the deficit. The rules also impose stricter surveillance by Brussels over the budgets of member states, with the introduction of an early warning system whereby they will be asked to take action if they move towards a higher deficit and debt.

Mr Rehn said the new tools will be complemented by the new intergovernmental treaty to be signed in March, which would further improve economic governance with sanctions introduced automatically.

He regretted the opposing stand taken by the UK and warned that if Prime Minister David Cameron adopted this position to try and avoid financial regulation by the EU, it would not be possible “as everyone had to learn from the lessons of the past”.