The European Union completed a framework for tougher controls on spending by euro-area governments in a German-led bid to prevent a repeat of the debt crisis that has threatened to break apart the single currency.
The European Parliament voted to let the EU screen the budgets of euro nations earlier and more closely monitor countries where rising borrowing costs pose risks to financial stability. The assembly also approved tighter EU fiscal surveillance of nations after they exit rescue programs.
With Europe still struggling to contain a crisis that Greece triggered in late 2009, the two pieces of legislation complement 2011 laws that granted the EU stronger powers to sanction spendthrift euro countries. The latest rules also follow a new European treaty aimed at limiting budget deficits.
“With such rules in place three years ago, we would have avoided the problems currently experienced by some countries and which have threatened the whole euro zone since it would have been possible to take early, clear and quick actions,” said Jean-Paul Gauzes, a French member who helped steer the measures through the 27-nation EU Parliament today in Strasbourg, France. European governments have already signaled their support after a negotiated deal with the assembly last month, making their final approval a formality in the coming weeks.
The 17-nation euro area is putting the finishing touches on its fiscal straitjacket as economic sluggishness in Europe prompts calls for policy makers to pay more attention to growth-boosting policies. As a result, the new rules could be put to a political test the moment they start to be applied.
France wants an extra year until 2014 to bring its deficit within the EU limit of 3% of gross domestic product, Italy is mired in a post-election political stalemate that threatens to reignite debt-market tensions, and Ireland this year intends to become the first euro country to emerge from an aid program.
In a provision that may limit any extra backsliding by France, the more-intrusive EU fiscal surveillance of euro countries will let the European Commission examine their draft budgets before approval by national parliaments. Annual spending plans will have to be submitted to the Brussels-based commission by Oct. 15 the previous year.
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.
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.
Cyprus last June became the fifth euro-area nation to ask for a financial rescue. The request, still being negotiated, follows 486 billion euros ($633 billion) in European and IMF commitments for Greece, Ireland, Portugal and Spain’s banking system since 2010. It also follows the ECB’s announcement in September of a bond-buying program for euro nations willing to sign up to austerity conditions -- an offer that has soothed debt markets without yet being triggered.
With the latest commission forecasts for 2013 pointing to the first back-to-back annual contraction of the region’s economy since the single currency’s birth in 1999, the political debate has shifted to the scope for giving euro governments leeway to overshoot deficit targets. Last week, EU Economic and Monetary Affairs Commissioner Olli Rehn signaled a readiness to be more flexible in requiring fiscal cuts.
The EU Parliament added language to the new rules to help promote growth.
The assembly failed to achieve something more ambitious: a fast-track move toward debt pooling by euro governments. In the face of opposition to such a step by a German-led group of countries, and as part of last month’s negotiated agreement with national governments, Parliament representatives discarded an appeal made last June for a fund to pool and help repay the debts of nations using the euro.
The commission, which proposed the new euro-area fiscal legislation in November 2011, also opposed this initiative. In a concession, the commission agreed to create an “expert group” to assess the feasibility of debt pooling in the euro area and produce a report by March 2014.
EU governments are tentatively scheduled to give their final endorsement of the extra budget-oversight rules on May 13, with publication of the legislation in the Official Journal and its entry into force due to take place several weeks later.