European Union governments set tougher rules on budget deficits in the latest draft of a planned fiscal treaty, bowing to some objections raised by the European Central Bank.
The blueprint, to be discussed on Jan. 23 by EU finance ministers, will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product, according to the draft dated Jan. 19 obtained by Bloomberg News.
The pact also empowers the European Commission to set deadlines for budgetary convergence. It gives the European Court of Justice the power to fine countries whose balanced-budget laws don’t pass muster, while stopping short of the ECB’s request that the court more broadly enforce the budget rules.
The latest draft is a return to German Chancellor Angela Merkel’s drive to put stiffer rules on deficit control at the heart of efforts to combat the debt crisis. It also does more to heed ECB President Mario Draghi’s warning that governments must follow through on their “breakthrough” commitment to restore credibility to public finances in the 17-nation euro area.
“It is now important to swiftly implement all of those decisions to put the euro-area economy back on course,” Draghi said at an event in Abu Dhabi yesterday.
The finance ministers on Jan. 23 will also discuss a separate draft accord on Europe’s planned permanent rescue fund that waters down earlier provisions on debt restructurings. The proposed agreement still calls for clauses in bond contracts that would prevent small clusters of investors from blocking a restructuring, while deeming writeoffs “exceptional” and subject to International Monetary Fund standards, according to a draft text.
Also on the agenda is a second financing package for Greece, which faces a 14.5 billion-euro ($18.8 billion) bond payment on March 20. Key to the new bailout package is a debt- swap deal between Greek officials and private creditors, who are continuing negotiations today in Athens.
European stocks dropped from a five-month high and the euro weakened as Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos resumed the talks on a debt swap with Institute of International Finance Managing Director Charles Dallara. The Stoxx Europe 600 Index declined 0.4 percent at 2:03 p.m. in Brussels. The euro was down 0.4 percent against the dollar, trading at $1.2911.
ECB Executive Board member Joerg Asmussen on Jan. 12 requested “substantial changes” to the fiscal-treaty draft, saying the measure should include “ambitious and binding calendars” for meeting new budget goals, as well as an automatic correction mechanism. These changes are reflected in the new draft.
The treaty will enshrine tougher sanctions, which are already in effect, at the constitutional level. It will make it easier to penalize high-deficit states and require each country to enact balanced-budget amendments.
An ECB spokesman reached late yesterday declined to comment. Martin Kotthaus, chief spokesman for the German Finance Ministry, declined to comment on the pact when contacted by telephone in Berlin.
Asmussen also sought to give the Court of Justice an “effective enforcement of all elements” of the balanced-budget rules. And he called for limiting “escape clauses” to natural catastrophes and “serious” emergencies beyond the control of national governments.
The new treaty is tougher on both elements without adopting the full range of the ECB recommendations.
It says the court could impose a lump sum penalty of up to 0.1 percent of a country’s gross domestic product, to be paid into the euro area’s permanent rescue fund, on countries whose budget-balancing provisions are questioned.
The draft also says countries could avoid penalties if they face “exceptional circumstances” such as severe economic downturns or an “unusual event” that has a major impact on the affected government’s financial position, according to the draft -- a wider range of exceptions than the ECB sought.
The document says the treaty will enter into force after 12 members of the 17-country euro zone have ratified it. It also says necessary steps to implement the treaty changes shall be taken “within five years at most” after the treaty takes effect.
“We are pleased to see recent clarifications to this international agreement,” Pia Ahrenkilde-Hansen, a spokeswoman for the European Commission, said today in Brussels. “The work is going in the right direction.”