EU completes German-designed fiscal straitjacket for euro area

Italian Sovereignty

Another measure may cost Italy some of its fiscal sovereignty should bond markets turn against Italian sovereign debt. Under this part of the package, the commission will gain the right to place under “enhanced surveillance” any euro nation “experiencing severe difficulties with regard to its financial stability likely to have adverse spillover effects on other member states of the euro area.”

A country subject to enhanced surveillance would be required to take budgetary steps recommended at European level to address the troubles and would face “regular review missions” by the commission to gauge progress. These, in turn, could lead to further European recommendations for “corrective” fiscal actions.

The commission would also have the right to force a nation under enhanced surveillance to carry out “stress test exercises or sensitivity analyses” on the domestic financial system, report the results to European authorities and face a peer review of its supervisory capacities. The commission could prolong enhanced surveillance of a country every six months.

Corrective Measures

Ireland, the second euro-area member to request a financial rescue after Greece in 2010, may be the first to trigger the new provisions on extra oversight of nations that have exited an aid program. Under the system of “post-program surveillance,” the commission will review the economic, fiscal and financial situation of the country in question and have the right to propose corrective measures.

A country that has exited a rescue will face post-program surveillance provided at least 75% of the aid received hasn’t been repaid. Governments can extend the period of surveillance should financial or budgetary risks persist.

A fourth element of the package covers macroeconomic adjustment programs for countries requesting emergency funds. It institutionalizes practices in place for governments that have already sought aid, outlining roles for the commission, the European Central Bank and the International Monetary Fund in drafting national economic policies.

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