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Bonds News

UPDATE 3-Merkel brushes off Trichet concerns over fiscal rules

* ECB says Trichet doesn’t fully support new EU fiscal rules

* Merkel says she expects rules to be agreed by leaders

* Sanctions on sinners would depend on political decision

* EU adds footnote to report to reflect Trichet’s concerns

* Analysts doubt whether ECB concerns will sway politicians

(Adds EU addition of Trichet reservations to report)

By Marc Jones and Andreas Rinke

FRANKFURT/BERLIN, Oct 21 (Reuters) - German Chancellor Angela Merkel said EU leaders need a clear mandate to deal with states that break deficit rules, brushing off concerns from the head of the European Central Bank, which favours more automatic penalties.

The ECB said on Thursday that Jean-Claude Trichet did not fully support the new rules on fiscal discipline, designed to prevent future sovereign debt crises and drafted in a deal between Germany and France.

EU finance ministers agreed on Monday to toughen the bloc’s budget regulations after the agreement struck in France between Merkel and French President Nicolas Sarkozy, which toughened up old rules but diluted the power of plans originally put forward by the European Commission and the ECB.

Merkel accepting French demands to give politicians more control over imposing penalties, in exchange for Sarkozy backing German calls to amend EU treaties to strip persistent deficit sinners of voting rights and push for an orderly default mechanism. [ID:nLDE69H2DD]

“The Task Force of the Working Group (of European Council President Herman Van Rompuy) has prepared a good document. But we need more,” Merkel said.

Under the proposals drawn up by the task force, rule breakers would only face sanctions six months after being warned, ignoring the ECB’s persistent calls for semi-automatic punishments.

POLITICAL DECISION

That means it would still take a political decision by a qualified majority of euro zone governments to start disciplinary action against a state with an excessive deficit, and a majority could still block any planned financial penalty.

“It is correct that the President of the ECB does not subscribe to all elements of the report,” an ECB spokesman said, after the Financial Times said Trichet wanted the draft proposals to be withdrawn because they did not include a line on his objection to parts of the plans.

The EU subsequently added a footnote on Trichet’s reservations in the annexe section at the end of the proposals.

Merkel said she had not spoken to the ECB chief but expected the proposals to be agreed by government leaders in Brussels next week and to be finalised by spring.

“As for the changes, together we are of the opinion that what was agreed between Germany and France should also be agreed at the European Council,” she said.

“This means that we get a clear mandate in order to make changes to the contract”.

In Helsinki, Finnish Finance Minister Jyrki Katainen expressed concern that the Franco-German proposals for changing the treaty could marginalise smaller EU countries. [ID:nLDE69K0WF]

ECB WANTED STRICTER REGIME

The ECB published its recommendations for stricter fiscal governance in June. In terms of the procedure for implementation, the EU’s proposals fall well short of the suggestions, however, explaining the central bank’s disquiet.

ECB Vice-President Vitor Constancio told reporters in Frankfurt on Wednesday that the central bank wanted tougher rules, a sentiment matched by fellow ECB board member -- and one of the architects of Europe’s original fiscal rules -- Juergen Stark. [ID:nFLAKLE6D6] [ID:nFLAKLE6D7]

The central bank has called for a system of semi-automatic punishments for countries running up debts, including stopping access to European funding and aid, as well as measures now being pushed for by Germany such as suspending voting rights.

Semi-automatic rules would mean a majority of member countries would have to voice an opposition before the EU considered halting the sanctions process. While the EU proposals do contain that element, politicians inserted two extra votes over a six-month period before sanctions become automatic.

(To see ECB proposals please click: here)

DISMAY BUT DEAF EARS

Merkel was pilloried by coalition allies and the media on Wednesday for dropping German demands for automatic enforcement of EU budget rules. [ID:nLDE69J1N5]

Caught off guard by the deal reached in the French town of Deauville on Monday, Merkel’s centre-right allies said German taxpayers who bankrolled Greece’s rescue package had been let down having been give promises of automatic punishments for future debt sinners.

Euro zone officials have also expressed dismay. [ID:nLDE69I0VK]

Analysts said the ECB’s cries may fall on deaf ears, however, and raised questions whether the central bank would in future be prepared to install controversial measures similar to its current government bond buying programme.

“I can’t see that the ECB is somehow above France and Germany,” said Societe Generale economist James Nixon.

“It keeps the political pressure up and is another bargaining counter. The ECB is indicating implicitly that they won’t be prepared in the future to support sovereigns (governments) that are in financial difficulties, and that things like the ECB’s bond-buying programme was and will remain a very, very exceptional circumstance,” he said.

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