EU proposes tougher budget rules

[October 23, 2010]  BRUSSELS (AP) -- The European Commission is proposing new penalties for countries that spend too much in the hope of preventing another government debt crisis like the one that forced an international financial bailout of Greece.

A key proposal Wednesday would to force countries to set aside 0.2 percent of their gross domestic product if they run up too much debt.

This set-aside would be put into a noninterest-bearing account and converted into a fine if the country involved does not comply with EU recommendations to bring debt down toward the official limit of 60 percent of GDP.

The new proposals come after a debt crisis that showed an older set of rules lacked teeth. EU member governments never gathered the will to fine other eurozone members when they ran budget deficits that broke the limits set to protect the shared euro currency.

The old rules' weakness was underlined when it took a last-minute bailout from the other eurozone governments and the International Monetary Fund to keep Greece from defaulting on government debt in May.

This time, the Commission is proposing that it will be the one to pass judgement on whether a country is punished. Member countries would then have to vote to prevent the sanction, as opposed to the previous Stability and Growth Pact (SGP) when they were judge and jury.

"For member states of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions," the Commission said. "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."

The Commission said the package it is presenting contains "the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the economic and monetary union" in 1999.

The Commission said its proposals are compatible with the existing Treaty of Lisbon and would therefore not require a new treaty. However, the proposals are not yet law and have to be passed by the European Parliament and national governments.

Germany and the Netherlands appear to favor tough new rules, but a number of countries, including France, have voiced unease at the prospect of handing over greater fiscal powers to the Commission.

Finance ministers of the 16 countries that use the euro meet Thursday, followed Friday by the wider 27-nation EU.

[Associated Press; By PAN PYLAS]

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