February 28, 2024

Europe to Vote on Tougher Rules for Currency

While steering far clear of transferring actual authority over national budgets here, the revamped rules, scheduled for a vote 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 ones: budget deficits of no more than 3 percent of gross domestic product and a maximum debt level of 60 percent of gross domestic product.

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

“We cannot go back in time and prevent the current crisis,” said Guy Verhofstadt, a former Belgian prime minister and leader of the centrist 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.

When the euro was created, France met the rules set by the currency’s founders because of 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 exceeded the deficit limits set in the rule book, 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 pressed early on to make 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 will be converted to a fine and forfeited.

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

In another innovation, countries with high debt that resist reducing it by a specified amount may 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, Italy concentrated on controlling its budget deficit. That was not enough, however, to keep it from getting caught up in the crisis as worries over sovereign debt levels spread around Europe’s periphery.

The revised rules are expected to pass the Parliament, their final hurdle, though Socialist opposition to some parts could make for a close vote. Once enacted, the rules 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 established 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 to sanctions.

Under the new rules, targets would apply to all 27 European Union members, but fines could be levied only on the 17 members that use the euro.

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

But will the rules work?

“What we have is a very strict and very intrusive surveillance regime,” said one European Union 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://feeds.nytimes.com/click.phdo?i=302dd6224fa7b704422927f8f5882dca

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