EU ministers struggle over budget rules

[October 18, 2010]  LUXEMBOURG (AP) -- European finance ministers locked horns Monday over stricter budget rules to avoid another government debt crisis as protests against spending cutbacks rattled France and Italy -- a sign of the politically difficult choices ahead.

"This is now the moment of truth for EU member states, whether they are genuinely for reinforced economic governance or not," Olli Rehn, EU monetary affairs commissioner, said on arrival at the two-day meeting.

Finance ministers considered two differing proposals spelling out penalties for overspending governments, after ballooning debt and deficit levels in countries like Greece, Ireland and Spain shook the foundations of the 16-nation eurozone this year.

But divisions remain over who would decide on penalties and when stricter rules should take effect.

Germany, the Netherlands, and Finland back near-automatic penalties proposed by the European Commission, the EU's executive. "Sanctions and debt criteria should be as specific and automatic as possible," said Finnish Finance Minister Jyrki Katainen.

Others, led by France and Italy, are very reluctant to hand over that much power to unelected officials in Brussels.

Paris and Rome already face large protests and strikes against austerity measures. In France, strikes against a government proposal to raise the retirement age to 62 from 60 came close to cutting off fuel supplies over the weekend.

The EU head office wants to force member states whose deficit tops 3 percent or whose debt hits 60 percent of gross domestic product to set aside up to 0.2 percent of their GDP. If they ignore suggestions on how to fall back into line, their deposits may be converted into fines. Only a majority vote of EU finance ministers could overrule sanctions.

A second set of rules is the work of a group led by EU President Herman Van Rompuy that includes Rehn, European Central Bank President Jean-Claude Trichet and the eurozone finance ministers. It met one last time Monday before presenting its report to EU leaders who are to meet Oct. 28-29.

One key question is if finance ministers back potential sanctions for countries that fail to address other issues, such a real estate and lending bubbles or uncompetitive wages -- macroeconomic imbalances that many economists say were at the heart of Europe's government debt crisis.

Pressure on EU member states to get their economies in order is mounting as a surging euro is casting doubt over the continent's fragile recovery.

In what some have called a "global currency war," governments worldwide try to boost their economies by pushing down the value of their currencies to make their exports more competitive.

The U.S. Federal Reserve on Friday spurred expectations of a new round of asset purchases, in effect pumping dollars into the economy and further weakening the value of the greenback. The euro was at $1.38 Monday morning Europe time, from under $1.29 in early September.

"Countries should not use currency as a means of competition," Dutch Finance Minister Jan Kees de Jager said as he arrived in Luxembourg.

Yet, the European Central Bank, which sets monetary policy for the 16 countries that use the euro, appears likely to remain on the sidelines in any currency war.

Top EU officials, including Trichet, have complained about China -- a major trade partner -- intervening to keep its currency weak. But the eurozone appears unlikely to take action beyond talk and diplomacy.

A hands-off policy by the ECB could mean trouble for the currency union's weakest members, which are facing harsh government budget cuts and are desperate for export-led growth.

"The eurozone is likely to be the loser in this," said Simon Tilford, chief economist at the Centre for European Reform in London. He says big Asian economies like China and South Korea will race to keep their own currencies stable against the dollar.

The EU finance ministers will also prepare their position for a meeting with their counterparts in the Group of 20 rich and developing nations beginning Friday in Seoul, South Korea.

European leaders will also have to decide whether they are prepared to give up seats on the IMF's decision-making board to give developing countries more say, as the United States has demanded.

Another possible issue in Luxembourg could be new regulation for hedge funds. Officials said they were nearing a compromise on a so-called European passport, that would allow non-EU-based hedge funds and fund managers access to the entire European market.

[Associated Press; By GABRIELE STEINHAUSER]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.