Tough draft rules aim to prevent another crisis

Commission proposes economic overhaul, but resistance expected from some countries.

The European Commission is on 12 May to propose the biggest advance in EU co-ordination of national economic policies since the creation of the single currency.

Proposals to be published include the creation of a “permanent crisis resolution mechanism” to handle any future scenario, such as the Greek debt crisis, where a eurozone country has to be rescued from default. They will also include a toughening up of the stability and growth pact – through the application of sanctions – and mutual reviews of draft budgets.

The Commission will argue that Greece’s plight has proved that the eurozone needs tighter economic governance – a point already acknowledged by EU leaders at a summit in March. Some proposals, however, are expected to meet resistance from member states.

The crisis-resolution mechanism would offer financial support through bilateral loans from other eurozone countries, with lending conditions fixed in advance.

Olli Rehn, the European commissioner for economic and monetary affairs, has said that the mechanism will have “strong built-in disincentives for activation”.

“We have to make this safety net of last resort so unattractive that no country wants to end up in [it],” Rehn said.

Avoiding paralysis

Rehn will argue that his mechanism is more practical than a plan, advanced by the German government, to create a European Monetary Fund (EMF), notably because it can be set up quickly without a treaty change.

Marco Buti, the director-general of the Commission’s economic and financial affairs department, said this week that the Commission did not “want to enter into another round of paralysis” by suggesting a treaty change.

Rehn wants finance ministers of the eurozone to vote by qualified majority on whether draft national budgets are in line with EU economic guidelines and rules on fiscal discipline. The Eurogroup would also adopt recommendations about what should be in countries’ budgets. The proposal is likely to be opposed by Angela Merkel, Germany’s chancellor, who earlier this year warned the Commission against politicising national budgetary processes.

Rehn will also propose that countries that repeatedly break EU limits on the size of budget deficits and national debt should be punished through suspension of EU structural funds.

Although the Maastricht treaty permits the imposition of financial penalties on countries that persistently flout the deficit and debt rules, such a step has never been taken in practice. Rehn’s paper will suggest that the suspension of structural funding could be made automatic, so avoiding the need for an awkward political decision. “We need to sharpen our teeth,” he said.

“We do not exclude changes to secondary legislation and new secondary legislation on the fiscal discipline side,” Buti said.

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