February 28, 2024

E.U. Moves to Toughen Rule Book for Euro Membership

While steering far clear of transferring actual authority over national budgets to Brussels, the revamped rules, set to be voted on Wednesday in the European Parliament, are described as tougher, more credible and more sophisticated than the original set, on paper at least.

Laid out in six pieces of legislation and known as the six pack, the rules contain the same targets for euro zone members as the old one: budget deficits of no more than 3 percent of gross domestic product, and a maximum debt level of 60 percent of G.D.P.

But this time, the drafters hope the policing system will be more credible. In part, that is because countries that break rules will face potential sanctions sooner, and a new voting system will make it harder for finance ministers to block them, as has happened in the past.

“We cannot go back in time and prevent the current crisis,” said Guy Verhofstadt, a former Belgian prime minister and leader of the liberal deputies in the European Parliament, “but we finally have armed ourselves with the right measures to avoid future ones.”

Yet nobody can predict whether the new rules will stand up better than the old ones if challenged by the euro zone’s two big members: Germany and France. That is crucial because, in the history of euro rule bending, Greece’s concealment of its true public finances — which came to light almost two years ago — was only the most flagrant example.

At the very beginning, when the euro was created, France met the rules laid down by the currency’s founders thanks to a windfall from the state-owned utility, France Télécom. Overnight, the French budget deficit shrank by 0.5 percent of G.D.P.

In 2003, Paris and Berlin both exceeded the deficit limits set in the rule book, officially called the Stability and Growth Pact. Faced with the prospect of sanctions and potential fines, Paris and Berlin used their political muscle to tear up the pact, and a weakened version was adopted in 2005.

The new sanctions system is even tougher than in the original, because countries that break rules will be pressured early on to put up a cash deposit — in a noninterest-bearing account — worth 0.2 percent of G.D.P.

If they then fail to correct their course, the deposit is converted to a fine and forfeited.

And, while the finance ministers still have to give the European Commission permission to punish errant countries, the voting system has been tweaked to make this significantly harder to block.

In another innovation, countries with high debt that resist bringing levels down by a specified amount can also be fined in a similar way. Had such a system been in place before, Italy — with a debt ratio of twice the maximum target — would have been required to consolidate more rapidly.

Instead, Rome concentrated on controlling its budget deficit. That was not enough, however, to keep it from getting sucked in as worries over sovereign debt levels spread around Europe’s periphery.

The package is expected to pass the Parliament, its final hurdle, though opposition to some parts from the Socialists could make for a close vote. Once enacted, it would begin to take effect in stages in January, with the rules on debt delayed until 2015.

If approved, an early warning system would be set up to spot developments like asset bubbles, including the housing booms that later collapsed in Spain and Ireland. Countries thought to be at risk could find themselves in an “excessive imbalance procedure” that could also lead ultimately to sanctions.

Though targets apply to all 27 E.U. members, fines can be levied only on the 17 countries in the euro zone.

Supporters of the new rules believe that financial markets have overlooked their importance, because reaching agreement has been so tortuous and time consuming.

But will it work?

“What we have is a very strict and very intrusive surveillance regime,” said one E.U. official not authorized to speak publicly. “You are only one decision away from potentially having to face sanctions.”’

But he also acknowledged the challenges ahead in identifying looming problems like asset bubbles because much will rely on interpretation of data.

Article source: http://www.nytimes.com/2011/09/28/business/global/eu-moves-to-toughen-rule-book-for-euro-membership.html?partner=rss&emc=rss

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