EU proposes new penalties for budget rule breakers

Sunday, 3 October 2010 22:20 - - {{hitsCtrl.values.hits}}

BRUSSELS, (Xinhua) -- The European Commission unveiled a package of legislative proposals last week to tighten up sanctions on repeated budget rule breakers in the eurozone in a bid to avoid another sovereign debt crisis.

The legislative package is made up of six pieces of legislation: four proposals deal with fiscal issues, including a wide-ranging reform of the Stability and Growth Pact (SGP), while the rest two aim to effectively detect and address emerging macroeconomic imbalances within the EU and the eurozone, the commission said in a statement.

According to the proposals, the SGP will be implemented more strictly for members of the 16-nation eurozone. Under the SGP, EU countries should keep their deficit under 3 percent of gross domestic product (GDP), and their debt under 60 percent of the GDP.

“For member states of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions,” said the commission, the executive body of the European Union (EU).

“In other words, the SGP will become more ‘rules based’ and sanctions will be the normal consequence to expect for countries in breach of their commitments,” it said.

If a member state significantly deviates from prudent fiscal policy-making, it will be requested to put money into an interest-bearing deposit and will get the interest.

And a non-interest bearing deposit amounting to 0.2 percent of the GDP will be needed for a member state in excessive deficit, and the money will be converted into fine if the country does not implement recommendations to correct its excessive deficit, the proposed legislation said.

Interest gained by the commission on these deposits or fines would be distributed among eurozone countries without excessive deficits or imbalances, the proposals said.

Meanwhile, more emphasis will be put on the debt level of EU countries, according to the proposals.

Member states whose debt exceeds 60 percent of the GDP should take steps to reduce it at a satisfactory pace, defined as a reduction of one twentieth of the difference with the 60 percent threshold over the last three years.

To ensure enforcement of the budget rules, the commission suggested that a “reverse voting mechanism” should be applied when imposing sanctions on offenders. That means a sanction will be considered adopted under the commission’s proposals, unless the EU member states turn it down by a qualified majority.

To address macroeconomic imbalances, the commission proposed to introduce the Excessive Imbalance Procedure, under which a member state with severe economic imbalances would be asked to present a correction action plan to be vetted by the EU member states.

If a member state fails to heed to the recommended action plan, it will be requested to pay a yearly fine equal to 0.1 percent of its GDP.

The new proposals come after a massive debt crisis in Greece forced other eurozone members and the International Monetary Fund to bail out Athens in May and showed the old set of rules aimed at keeping governments from overspending was toothless.

The proposals will have to be approved by EU member states and the European Parliament before they can be enforced.

Due to differences among EU member states, analysts said the proposed package may be watered down when it finally comes into law.