* EU executive proposes tougher sanctions on deficit sinners
* Unions strike, march against austerity measures
* Protests seen as too limited to sway governments * Portugal to be grilled by EU ministers on deficit
(Adds EU to grill Portugal, updates protests)
By Jan Strupczewski and Inmaculada Sanz
BRUSSELS/MADRID, Sept 29 (Reuters) - The European Commission proposed steep compulsory deposits and fines on Wednesday for euro zone countries that breach EU budget rules, as trade unions staged strikes and protests against austerity measures.
In a sign of the new “get tough” policy on fiscal deficits, euro zone sources said finance ministers of the single currency area would grill Portugal on its 2011 budget plans on Thursday and press for more radical measures to address market concerns. [ID:nLDE68S1OT]
Spain’s first general strike for eight years disrupted public transport and some factories but seemed unlikely to make Socialist Prime Minister Jose Luis Rodriguez Zapatero back down on wage cuts, spending curbs, pension and labour market reforms. [ID:nLDE68S07G]
The European Trade Union Confederation said at least 100,000 joined a pan-European anti-austerity march in Brussels. Police put the crowd at 56,000 and said 218 people were detained for minor offences. Up to 5,000 demonstrators marched in Warsaw but other rallies appeared smaller. [ID:nLDE68S246]
Analysts said the protests were too small and disparate to sway debt-laden governments from cutting public deficits. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For stories on the euro zone crisis, click on [ID:nLDE6211JD] For snap analysis on unions, click on [ID:nLDE68S1T4] For BREAKINGVIEWS column on protests, click on [ID:nLDE68S1T4] For factbox on austerity in Europe, click on [ID:nLDE68S16A] For graphic on Europe's struggle with debt, click on r.reuters.com/hyb65p Interactive timeline on the eurozone crisis link.reuters.com/xad65p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Under pressure from investors who fear another Greek-style meltdown, Ireland was preparing to announce a massive bill for rescuing stricken Anglo Irish Bank [ANGIB.UL], while government and opposition leaders in Portugal wrangled over spending cuts or tax hikes to narrow that country's yawning deficit.
European Commission President Jose Manuel Barroso said the political impasse in his native Portugal was serious and the government had to stick to its fiscal targets. [ID:nLDE68S0DK]
“Portugal has to show responsibility,” he said, adding that markets believed the government was “shilly-shallying”.
The European Union executive outlined plans to prevent any repetition of Greece’s debt crisis by making repeat deficit offenders deposit 0.2 percent of their gross domestic product with Brussels. [ID:nBRQ009982]
The interest-bearing deposit would be converted into a fine unless the country in breach took effective action to cut the budget gap below EU limits.
If a country repeatedly ignored recommendations to rectify severe economic imbalances in wage, macroeconomic and fiscal policy, it would incur a yearly fine of 0.1 percent of GDP until EU finance ministers decided corrective action had been taken.
“(For) the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions,” the Commission said. “Sanctions will be the normal consequence ... for countries in breach of their commitments.”
The proposals require approval by EU governments and the European Parliament, with Germany and France apparently still at odds about how automatic the application of penalties should be and whether politicians should retain the final say.
Euro zone markets steadied on Wednesday with the risk premium on Irish and Portuguese government bonds over benchmark German Bunds off Tuesday’s peaks, although the cost of insuring Portuguese debt against default hit a new high. [ID:nLDE68S1GX]
Banks took far less three-month liquidity than expected from the European Central Bank, soothing some market fears, but the ECB said in a report the EU banking sector remains vulnerable and its recovery from the financial crisis has been uneven.
The new EU budget rules, demanded by chief paymaster Germany as the price for bailing out Greece and providing a wider safety net for the euro zone in May, aim to prevent any state fiddling its statistics and running up unsustainable deficits in future.
However, some economists argue that stiffer penalties for deficit sinners will not solve the euro zone’s problems since harsher austerity may choke economic growth in those countries and increase unemployment, further straining public finances.
“Unless there is a rethink, the euro zone risks permanent crisis, with chronically weak economic growth across the region as a whole and politically destabilising deflation in the struggling member states,” Simon Tilford, chief economist of the Centre for European Reform, said in an essay.
France, determined to cling to its AAA credit rating which enables it to service its debt at low market rates, announced a 2011 budget designed to reduce the deficit to 6 percent of GDP from an expected 7.7 percent this year. [ID:nLDE68S18B]
Economists said most savings would come from the automatic expiry of economic stimulus measures and a reduction in tax breaks rather than any serious cut in high public spending.
EU policymakers voiced support for Ireland’s efforts to surmount a huge financial crunch following the crumbling of its banking sector after a real estate bubble burst, but they urged Dublin to move swiftly to reassure markets with decisive steps.
“Ireland knows what it needs to do, starting with an ambitious fiscal restructuring plan with concrete measures, in order to reach the targets it has set,” Lorenzo Bini Smaghi of the ECB’s executive board said. “They have to do it quickly.”
Prime Minister Brian Cowen is set to reveal the final cost of winding down Anglo Irish after markets close on Thursday, expected to propel government debt to over 100 percent of GDP.
The Irish Times reported the bill could rise above 30 billion euros ($40.4 billion) under a worst case scenario but would not be as high as the 35 billion euros cited by credit rating agency Standard & Poor’s. [ID:nLDE68S04Z]
However, markets are concerned that Dublin is not planning to outline more than 3 billion euros in cuts in its 2011 budget until December, leaving long weeks of uncertainty.
In Portugal, conservative opposition leaders said after meetings with President Annibal Cavaco Silva they were prepared to help the minority Socialist government pass a deficit-cutting budget provided it reduced spending rather than raising taxes.
Newspapers said the government wanted to push through tax rises to meet this year’s deficit target and prepare next year’s budget. Analysts say a rise in VAT sales tax is likely. [ID:nLDE68S0DK]
additional reporting by Axel Bugge in Lisbon, Carmel Crimmins in Dublin, Vicky Buffery and Emile Picy in Paris; writing by Paul Taylor; editing by Mike Peacock, Ron Askew