The European Commission yesterday unveiled plans to start making its member states more accountable in the way they manage their public finances.
According to the new proposals, member states will be risking fines and possibly losing some of their EU funding if they keep persisting in breaking the deficit and debt rules under the EU’s Growth and Stability Pact.
Currently, member states are obliged to keep their budget deficits within the three per cent of GDP threshold and their debts to under 60 per cent of GDP. However, many member states, including Malta, are currently undergoing the so called Excessive Deficit Procedure after surpassing these thresholds.
According to the new proposals, which still have to be endorsed by the member states and the European Parliament, economic governance, particularly when it comes to eurozone will become much tougher.
The new rules state that member states that exceed the 60 per cent debt limit will be required to reduce their debt by one-twentieth of the difference between their debt level and the 60 per cent limit. So, if a country’s debt is 100 per cent of GDP, as it is in some cases, it will have to reduce its debt by two per cent of GDP in a year.
Those who do not stick to the overall rules and fail to act to bring their deficits and debt below the EU’s minimum levels could now face fines of up to 0.2 per cent of gross domestic product. At the same time, member states that don’t act to address macroeconomic imbalances, such as rapidly rising wages that make the economy less competitive will also face fines of up to 0.1 per cent of GDP.
The five regulations and one directive proposed yesterday will amend the Stability and Growth Pact and introduce a new imbalance alert system, where states are punished for running up excessive trade deficits or failing to address ballooning house prices.
“The sovereign debt crisis earlier this year exposed gaps and weaknesses in macroeconomic surveillance, in particular in the Stability and Growth Pact, that cannot continue,” said Commission President José Manuel Barroso ahead of the launch.
“The time has come to complete monetary union with economic union. Alongside regulatory reform, we need an overhaul of our economic governance tools,” he said.
The Commission’s proposals pre-empt a report by a task force of EU finance ministers chaired by European Council President Herman Van Rompuy, which met for the fifth time last Monday. After the meeting, Mr Van Rompuy said ministers had reached a “very large degree of convergence” on tougher sanctions for profligate states, a greater focus on government debt and closer monitoring of broader economic policies.
Although the EU is moving rapidly towards stricter rules, there are still some outstanding issues which have to be resolved. One is when these sanctions will kick in.
Twenty-four EU member states have flouted the deficit limit, set at three per cent of gross domestic product, since the start of the financial crisis and according to the Commission’s latest economic forecast, 17 states are set to break the 60 per cent of GDP debt limit this year, including Malta.
Sanctions cannot be applied retrospectively but most member states will not have cleaned up their public finances until after 2013.
The second problem is what constitutes a satisfactory pace of debt reduction. The Commission’s proposals states that once countries breach the 60 per cent limit, they should start chopping borrowing by five per cent of the excess over a three-year period or face coming under the excessive deficit procedure.
With regards to the automatic introduction of sanctions, the Commission is suggesting a new reverse majority rule, where member states can only overturn a sanctions decision by getting a qualified majority on side, which under Lisbon Treaty rules will mean 55 per cent of member states representing 65 per cent of the EU population.
EU leaders meeting in Brussels for a summit next month are expected to discuss and possibly approve the new proposals.