Commissioner urges tougher EU budgetary rules

THE EUROPEAN economics commissioner Olli Rehn has fired his opening salvo in what is likely to be a contentious political battle over new measures to penalise countries that repeatedly violate Europe’s budget rules.

Arguing that the Greek fiscal crisis has prompted a “pressing and urgent need” to strengthen policy co-ordination and toughen surveillance, Mr Rehn also wants euro participants to adopt a permanent crisis-resolution mechanism to support vulnerable members of the currency.

The plan includes potentially divisive measures that would encroach on national powers jealously guarded by EU member states, big and small.

Mr Rehn is already tilting against other views set out by German chancellor Angela Merkel, arguing that existing policy instruments could be given more teeth without the treaty changes sought by Berlin.

He also questioned Dr Merkel’s suggestion that the time had now come to contemplate measures to allow a country to leave the euro, saying such a move would be untenable with the principle of an “ever closer union” set out by the EU’s founding fathers.

Mr Rehn will not publish his proposals in full on May 12th, giving him room to fine-tune them in the light of his talks with EU finance ministers at an informal meeting which starts tomorrow in Madrid.

The commissioner said the rescue mechanism he planned would be operated by euro members in co- operation with the European Commission and the European Central Bank and would be separate to the ad-hoc rescue plan developed for Greece.

He declined to say whether Greece might have to draw down the €45 billion credit it was promised on Sunday, saying the “possible financial assistance” served the immediate need.

“It is necessary to set up a permanent crisis-resolution mechanism with strong disincentives,” he said.

“The key is how do we avoid moral hazard and how do we make this safety net of last resort so unattractive that no country voluntarily wants to end up in such a situation.”

Although the commission previously expressed support for a German plan to create a European monetary fund, Mr Rehn said he understood that proposal would need a treaty change and said his own plan would not.

Measures that would empower member states to examine each other’s budget plans are on the table as part of a wider effort to impose greater fiscal discipline on all EU members, as are proposals to impose automatic fines on the countries that breach the 3 per cent deficit limit set out in the EU rulebook.

Further measures would deprive repeat offenders of EU cohesion funds and take account of the level of a country’s national debt when assessing whether it should take corrective budgetary action.

Commission officials acknowledge the divergent thrust of economic policy among member states, particularly between Germany and France.

However, they say both policy traditions are subject to the same long-term constraints.

Of the French doctrine, they say a relentless build-up of debt eventually hampers growth. On Germany, they say a strict and rigid policy framework that weighs heavily on domestic consumption is “not sustainable”.

While European authorities have the power to fine countries that breach EU deficit guidelines, they have never deployed such powers.

Even though automatic fines would remove political discretion from the equation, the counter-argument runs that such a mechanism could be a “sterile” means of enforcing budgetary control.

On the suspension of payment of cohesion grants, the concern is that such a measure would penalise the poorer peripheral member states that are beneficiaries of a fund to upgrade their national systems.

In spite of these difficulties, however, the EU executive believes the Greek crisis presents an opportunity to overhaul its budget rules and make use of existing legal provisions.