Wednesday

22nd May 2019

Spectre of treaty change accompanies new eurozone agreement

Eurozone finance chiefs have backed new rules for stricter fiscal discipline, including automatic penalties. Meanwhile, France and Germany have spoken out in favour of a permanent bail-out fund that would require a change to the EU treaties.

Under the previous set-up, eurozone governments which flouted rules limiting the size of their public deficit could only be sanctioned following a majority decision by their peers. As a result, scofflaws regularly got away without punishment.

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  • Mr Sarkozy and Ms Merkel in Deauville - the idea of an EU treaty chance is likely to face hostility in the Union (Photo: bundeskanzlerin.de)

The new "reverse majority" system agreed in Brussels on Monday (18 October) flips the framework on its head, with penalties automatically applied unless a majority of states oppose the move.

Governments will be given a six-month period of grace in order to fix their excesses in a softening clause pushed through by France.

Paris, as well as Warsaw and Rome had initially opposed the idea of automatic sanctions, while Germany insisted any reforms would not be credible unless they had some teeth.

National capitals have until now been required to keep their deficits within three percent of GDP. The new system would also require that governments limit their overall debt to 60 percent of GDP.

Most eurozone governments currently stand well beyond the new red line and will have to progressively reduce their debt by five percent a year until they reach the agreed comfort zone.

Breaches risk financial sanctions, with countries obliged to keep on hand funds equivalent to the fine. If the situation does not improve within the six-month suspension period, the cash is to be lost.

Governments will also get a three-year period to come into line with the new regime.

The system is intended to introduce rigour and a real threat of response if countries do not comply, so that a situation similar to this year's €110 billion eurozone bail-out of Greece does not recur.

More controversially, France and Germany in a joint declaration on Monday backed the idea of a permanent eurozone bail-out fund to be introduced before 2013.

The decision came out of a bilateral meeting between Nicolas Sarkozy and Angela Merkel in Deauville, France, ahead of a three-way get-together with the Russian President.

This move would require an EU treaty change agreed by a fresh inter-governmental conference, coming hot on the heels of the newly-agrees Lisbon pact.

"When a country has an excessive deficit and has not adopted appropriate measures after six months, there must be sanctions," Mr Sarkozy said, endorsing the planned rules. "The sanction procedure must be shorter and more efficient."

Ms Merkel for her part added: "For that, we need changes in the treaty."

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