28th Mar 2017

EU enters crucial week for budget rules

  • Investors this spring grew increasingly concerned by the level of EU government spending (Photo: Fotolia)

Europe is set to enter a crucial stage in its efforts to overhaul government spending rules this week, with talks in Brussels likely to produce several clashes between member states amid growing unrest from EU citizens over recent austerity measures.

Political negotiations on ways to prevent a repeat of this spring's fiscal crisis will take place on Monday (27 September) when EU finance ministers meet as part of European Council President Herman Van Rompuy's 'taskforce' on economic governance.

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On Wednesday the European Commission is set to come forward with concrete legislative proposals which will suggest a significant overall of the bloc's current spending rules, known as the Stability and Growth Pact.

In a recent letter to his EU homologues, German finance minister Wolfgang Schauble said he strongly supported the forthcoming commission plans to clampdown on states that repeatedly break the pact's rules, with a southern bloc considerably more hesitant.

In particular, France and Italy are less keen on commission plans for greater 'automaticity' of financial sanctions, fearing their hands could be tied to more unpopular spending cuts back home if they are to avoid a penalty fine from the commission.

The changes would mean that a qualified majority of member states would be needed to block a proposed fine from the commission, instead of a qualified majority to approve it, as is currently the case.

France is also concerned by the greater emphasis set to be placed on debt reduction in the proposals from Brussels, with member state reporting requirements largely focused on maintaining deficits below three percent of GDP at present.

While a debt limit of 60 percent of GDP currently exists in theory, the new rules are widely reported to call on member states to reduce their excess over this figure by five percent each year for three years or face a fine.

If implemented, the new measures would represent a major challenge for countries such as Italy which is predicted to run up a debt of 116 percent of GDP this year.

As well as reducing national government abilities to block an EU fine - theoretically possible at present but never handed out - the commission's proposals are also set to outline a new framework on the size of the financial penalties.

States that fail to follow commission guidelines on bringing their deficit and debt levels into line would be forced to place 0.2 percent of GDP into a special deposit bearing account.

And in a bid to reduce the divergences in member state competitiveness levels, governments that fail to comply with a new list of macroeconomic indicators could be forced to hand over one percent of GDP in fines.

The tough new proposals to curb government spending come amid a backdrop of growing unease among EU workers. Spanish public sector employees are planning a major strike this Wednesday, with protests also expected in Brussels.

Concerns over public sector cuts swept the more left-leaning Ed Miliband to the head of the UK's Labour party over the weekend, ahead of his brother David who had previously been the frontrunner.

They also come amid a Wall Street Journal report that the EU set up a secret committee to prevent a eurozone default just two months after the collapse of the Lehman Brothers bank in the US in 2008.

But divisions within the committee prevented it from coming forward with concrete plans, leaving leaders to come up with a last-minute deal in May of this year and highlighting the bloc's difficulties on effectively dealing with the economic crisis.

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