November 23, 2011 / 3:04 PM / 6 years ago

EU's Barroso wants tight euro zone budgets control

BRUSSELS (Reuters) - The European Commission proposed on Wednesday new, intrusive laws to ensure budgets of euro zone countries do not break EU rules and that their borrowing falls, which, once in place, could lead to joint debt issuance.

European Commission President Jose Manuel Barroso holds a news conference on new economic governance at the EU Commission headquarters in Brussels November 23, 2011. The European Commission proposed on Wednesday new, intrusive laws to make sure budgets of euro zone countries do not break EU rules and that their borrowing falls, which could lead to joint debt issuance in the future. REUTERS/Francois Lenoir

The proposals are part of the euro zone’s response to the sovereign debt crisis, which has now spread to threaten even the biggest members of the 17-member bloc, including Spain, Italy and France, by pushing up their borrowing costs.

“Without stronger governance it will be difficult, if not impossible, to sustain a common currency,” European Commission President Jose Manuel Barroso told a news conference.

The Commission, the executive arm of the 27-member European Union, proposed that euro zone governments send it draft budgets by mid-October, before they are voted on in national parliaments.

If the draft budgets are not in line with EU budget rules -- the Stability and Growth Pact -- the Commission could ask for changes and defend its position in the country’s parliament.

Euro zone countries would also have to set up independent fiscal councils -- bodies to evaluate their fiscal policy -- and base budget drafts on independent economic forecasts.

Euro zone countries should also set numerical fiscal rules in national legislation, preferably in the constitution, to ensure they reach a budget close to balance or in surplus, in structural terms.

Countries which are already in breach of the EU budget rules because of too high deficits, would face very close monitoring of policies by the Commission. The EU limit on budget deficits is 3 percent of gross domestic product and on debt is 60 percent of GDP.

Governments which are not yet cut off from market financing, but face such a threat, could be placed under very close policy surveillance by the Commission or not be eligible for emergency aid later.

COUNTRIES COULD BE ASKED TO APPLY FOR BAILOUT

EU Economic and Monetary Affairs Commissioner Olli Rehn said that because no country wanted to be placed in a euro zone emergency loan program, some had waited too long before asking for help, making the crisis worse for all.

In an apparent reference to Ireland and Portugal, which fought against requesting euro zone aid as long as they could, Rehn said:

“This has caused the situation to worsen significantly in the meantime, for the country concerned, and for the whole euro area, and it has increased costs to other member states and increased the financing needs as well.”

As a result, the Commission proposed that it should have the right to ask EU finance ministers to formally recommend that a country request financial assistance if the Commission and the European Central Bank think it should.

The intrusive proposals build on the already agreed sharpening of EU budget laws, which now envisage financial penalties for countries that do not play by the rules.

PROSPECT OF EURO ZONE BONDS

Once the tighter oversight and control of euro zone national fiscal policy is in place, the single currency area could jointly borrow from the market through what the Commission calls “stability bonds.”

The Commission outlined three main options for such joint debt issuance, without making any recommendations on which might be best.

One option is joint issuance of debt with joint liability of all debt by every country; the second is that there would be joint liability for issuance up to a certain percentage of GDP and the third that each country would guarantee its part of the joint issuance.

“We are launching the debate,” Barroso said.

“At this moment, the Commission has not yet decided on the preferred approach. We believe it is better to put those different options, in what I believe is a very objective way, based on sound analysis, to public consultation,” he said.

Germany is strongly opposed to joint debt issuance in the euro zone now, concerned it would give spendthrift governments a chance to piggyback on frugal ones with low borrowing costs.

“I find it extraordinarily inappropriate that the European Commission is suggesting various options for euro bonds today -- as if they were saying we can overcome the shortcomings of the currency union’s structure by collectivizing debt. This is precisely what will not work,” German Chancellor Angela Merkel said.

But Barroso said the study on the bonds was not against Germany. “Our intention is not to go against anybody and certainly not against the member state that is the biggest economy in the euro area and in the European Union.”

He also said Germany did not oppose joint issuance in principle, but questioned the timing of it.

“I absolutely don’t agree that there is absolute opposition of any country. On the contrary, in my contacts I get the exactly the opposite impression, that the idea of having stability bonds is making its way,” Barroso said.

“If you look at those comments made by people from Germany, they are in fact most of all about the timing of the options we are now putting (forward),” he said.

Reporting by Luke Baker and Jan Strupczewski; editing by Rex Merrifield

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