EU divided over reform plans for economy

EUROPEAN FINANCE ministers remained divided last night over plans to reform the EU’s economic system, as the governments of Portugal and Belgium came under fresh pressure to tackle their fiscal problems.

The ministers gathered in Brussels last night under the chairmanship of European Council president Herman Van Rompuy to determine how governments that break EU deficit and debt limits should be penalised.

The talks, which have dragged on for months, came in advance of legislative proposals from EU economics commissioner Olli Rehn on new measures to strengthen the EU’s economic system.

“We shall propose a legislative package which will include credible enforcement mechanisms based on two principles: sanctions will need to be semi-automatic and they will need to be triggered early enough in the process so they are essentially preventive,” Mr Rehn said, as he arrived for last night’s meeting.

“We want to achieve results fast and have this in force already next year. I want to encourage [the European] parliament and the council [of EU governments] to adopt our proposals so they are in force next year, by December of next year.”

However, major states are still at odds with each other. Germany continues to push for changes to EU treaties to have the voting rights of errant governments suspended.

European Central Bank (ECB) chief Jean Claude Trichet lent his voice to the debate yesterday, telling a committee of MEPs that debt levels should achieve a “reinforced status” in budgetary surveillance. “I am concerned that substantial progress is still needed to give public debt the prominent role it has in the letter of the [Lisbon] treaty.”

Mr Trichet warned the ECB would sound the alarm if they failed to agree reforms to Europe’s monetary union tough enough to prevent a future Greece-style crisis.

He set out “five questions” that euro-zone governments had to address in a new system for surveying and imposing sanctions on countries that let their finances get out of control. “If the responses were too timid in our opinion, we would make clearly the point,” Mr Trichet told the European Parliament in Brussels.

In a report yesterday the OECD said the Portuguese government should be prepared to take new measures to cut its budget deficit as increasing borrowing costs may undermine its economic recovery. “If acute market stress were to resurface, further fiscal tightening measures may need to be contemplated,” the Paris-based organisation said.

Political instability in Belgium, where the country’s politicians have been unable to form a government since elections more than 100 days ago, is also eroding market confidence in that country.

Belgian borrowing costs relative to Germany are increasing at the fastest rate in the single currency area as the political gap widens between Dutch-speaking Flemish nationalists and French-speaking socialists. A new coalition government cannot be formed without the support of both groups.