September 27, 2010 / 10:17 PM / 9 years ago

UPDATE 1-EU moves towards new sanctions on budget rule-breakers

* Ministers back tougher sanctions, disciplinary steps

* France, Germany clash on automatic sanctions

* EU Commission to present proposals on Wednesday

(Updates with statement, comments by Rehn and Lagarde)

By Julien Toyer and Marcin Grajewski

BRUSSELS, Sept 27 (Reuters) - European Union ministers backed tougher sanctions on Monday for euro zone budget rule-breakers and disciplinary steps for countries running high debts, but clashed over how automatic the penalties should be.

“The discussion today showed a very large degree of convergence on important issues related to budgetary and economic surveillance,” EU President Herman van Rompuy said after chairing the finance ministers’ talks in Brussels.

They agreed much more attention must be paid to debt, and countries which have debt higher than the EU limit of 60 percent of GDP and are not reducing it fast enough should face disciplinary action, he said in a statement. [ID:nLDE68Q29D]

There was also backing for a new system of sanctions.

“Sanctions would be introduced at an earlier stage, be more progressive and rely on a wider spectrum of enforcement measures. There was broad support that, as a first step and on the basis of the (European) Commission upcoming proposals, sanctions should be strengthened in the euro area,” Van Rompuy said.

The ministers’ discussions centred on proposals by the EU executive on new sanctions for euro zone countries which break the rules of the Stability and Growth Pact — the EU rulebook on public finances. [ID:nLDE68Q1OZ]

EU officials believe that stronger rules would help prevent another sovereign debt crisis similar to the one sparked by Greece this year and help regain the confidence of markets.

But financial markets would be likely to react nervously to any lack of progress, especially because of concern about Ireland’s public finances after Moody’s cut its ratings on nationalised lender Anglo Irish Bank [ANGIB.UL]. [ID:nLDE68Q15A]

AUTOMATIC OR NOT?

In a letter to the officials meeting on Monday, German Finance Minister Wolfgang Schaeuble said he wanted the EU’s budget rules to be given “more bite” and that they should include quasi-automatic sanctions [ID:nLDE68Q13G].

The Commission also wants to reduce the scope for discretionary decisions by EU finance ministers.

To achieve that, it has proposed that only a qualified majority of EU ministers should be able stop sanctions, or what the Commission calls reverse majority voting. Under the current rules, a qualified majority is needed to impose sanctions.

But French Economy Minister Christine Lagarde said the automaticity of the rules was a bad idea.

“To foresee a complete automaticity, a power totally in the hands of the experts, no. We believe that the political power, the political appreciation should remain fully in the game,” Lagarde told reporters.

“It is essential to us that there remains a degree of political input... Politics should not abdicate in favour of the experts... The fate of a country can’t be put totally in the hands of the experts,” she said.

Van Rompuy’s statement after the talks was formulated as a compromise, saying: “Whenever possible, decision-making rules on sanctions should be more automatic and based on a reverse majority rule.”

Another German notion — to freeze the flow of EU funds to countries that do not respect EU budget rules — seemed to be put off for more discussions, but not dismissed.

“Conditionality for the use of EU funds linked to sound implementation of the Stability and Growth Pact should also be introduced as soon as possible,” Van Rompuy’s statement said.

LOST MOMENTUM?

Leaders’ calls for sweeping changes earlier this year helped to reassure investors, but enthusiasm for big changes has waned as the currency area posted strong growth in the second quarter.

Even so, the Commission hopes there is enough momentum in the talks to adopt the rules by next year.

“We want to achieve results fast and have this in force already next year. I want to encourage (the European) Parliament and the (European) Council to adopt our proposals so they are in force next year, by December of next year,” Economic and Monetary Affairs Commissioner Olli Rehn said.

The European Commission is due to formally present its proposals on Wednesday.

Additional reporting by Ilona Wissenabch and LukE Baker, writing by Jan Strupczewski, editing by Timothy Heritage

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