* EU Commission to propose sanctions for budget sinners
* Finance ministers to debate reform twice next week
* EU’s Rehn upbeat on progress, but rifts may persist
By Marcin Grajewski
BRUSSELS, Sept 24 (Reuters) - Divisions are likely to emerge next week when European Union governments discuss sharpening the rules on budget discipline and its executive makes proposals for tougher sanctions on fiscal sinners.
The negotiations, launched after Greece’s profligacy brought the euro zone to the brink of a sovereign debt crisis, could herald a big shake-up of rules for the single currency 11 years after its creation, European diplomats say.
But the talks could also stall over differences between France, Germany and smaller countries over the scope of reform. This could mean the EU’s Stability and Growth Pact, an accord that underpins the euro currency, is only slightly amended.
“The last meeting (of EU finance ministers) showed big differences. They are likely to re-emerge next week, the debate is heated... But some progress cannot be ruled out,” said one EU diplomat.
Leaders’ calls for sweeping changes earlier this year helped to reassure investors and ward off a debt crisis, but enthusiasm has waned as the currency area posted strong growth in the second quarter. [ID:nLDE68C0KA]
Financial markets would be likely to react nervously to any lack of progress, especially after new doubts emerged over public finances in Ireland. [ID:nLDE68M11D]
ING said in a research note that “there still seems considerable room for pessimism to endure under the latest set of proposals.”
The European Commission, the EU’s executive, will make its proposals on Wednesday on how to force countries to keep their budget gaps below the bloc’s cap of 3 percent of gross domestic product and keep public debt levels on a declining path.
On the same day, trade unionists plan to bring 100,000 protestors to Brussels and other European cities over government austerity measures that are also part of the broader efforts to enforce budget discipline. [ID:nLDE68M09T]
EU sources said the Commission will propose that budget discipline offenders make an interest-bearing deposit of 0.2 percent of GDP as a penalty. A similar deposit could be forced on a country that has big macro-economic imbalances and fails to fix them. [ID:nLDE68M1TY]
“It is a significant sum that would not, however, drive a member state’s economy into bankruptcy,” EU Monetary Affairs Commissioner Ollie Rehn said in an interview for Finnish daily Helsingin Sanomat.
“Sanctions have to be determined at an early enough stage. The screw will turn gradually, but punishment can be avoided by corrective measures.”
The new sanctions would be semi-automatic, unlike the current ones which can be applied only after months or even years of negotiations. They have never been used.
EU finance ministers are expected to discuss the proposals when they meet in Brussels on Thursday and Friday. One EU official said their reaction may determine whether the new rules apply from next year as planned.
“I trust the package will get broad support,” Rehn said.
The ministers will also debate the general thrust of the reform on Monday at a meeting of a “task force” chaired by EU President Herman Van Rompuy.
The task force aims to improve economic governance -- or keep tighter controls on policy -- in the 16-nation euro zone and the 27-country EU to ward off any future crises.
EU governments have so far agreed only on reviewing one another’s budget plans early in the year to be able to press those who plan to spend too much.
Two Commission officials said the last meeting of the task force this month was a failure because Van Rompuy had proposed negotiating problems one by one, whereas many governments prefer to negotiate on the package as a whole.
Poland and some other countries, for example, could agree to tough sanctions, but only if the new rules allow countries to write off the costs of pension reform from deficits. This is unpalatable for Germany, which wants very tight fiscal rules.
There is also no agreement on a previous proposal for EU regional aid and farm funds to be suspended for countries that fail to keep their public finances under control.
The biggest difference is between heavyweights France and Germany. Paris would prefer the most radical elements of the reform to concern only the euro zone. Germany says the overhaul should embrace the whole EU.
France would like the euro zone to be a more political body and a counterweight to the rule-based European Central Bank.
Under EU laws, it is much easier to change rules in the euro zone than in the whole EU, where some reforms would involve treaty change rather than a quick intergovernmental deal.
Additional reporting by Jan Strupczewski and Brett Young in Helsinki; editing by Patrick Graham