22nd May 2022

Fines for deficit states more likely under EU plans

  • Spain is among eurozone members that face the prospect of fines in the future (Photo: rahego)

The European Commission has come forward with a major package of legislative proposals designed to keep member-state spending in check and prevent a repeat of the recent investor panic that threatened to break apart the 16-member eurozone.

Key components of Wednesday's (29 September) package include plans to pay closer attention to national debt levels and losses in competitiveness, together with a new system of fines for eurozone members that fail to adhere to the bloc's budgetary rules - known as the Stability and Growth Pact.

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"In the past, when the commission's advice was harsh, it was not sufficiently followed by the council [representing member states]," said commission President Jose Manuel Barroso. "The changes I have outlined will avoid this from happening again."

As tens of thousands of workers marched through the streets of Brussels and cities across Europe, Mr Barroso defended the plans against union criticism they were ill-timed and would increase the plights of lower-salaried employees.

"The money you use to reimburse debt is money you can't use to finance education, health care and pensions," the Portuguese politician told journalists. "Today, the Greek people are paying a very high price because their government did not respect the rules."

If implemented, the new framework would see eurozone countries that break the bloc's three percent of GDP deficit limit receive earlier and more automated warnings from Brussels, with governments forced to hand over 0.2 percent of their GDP into a deposit account.

Failure to comply with the follow-up recommendations from the commission would see the money converted into a permanent fine. Based on 2009 International Monetary Fund data, this could see a heavily indebted Dublin forced to hand over €330 million. A fine for Spain would total €2.1 billion.

A government appeal to have its fine overturned would need to win the support of a qualified majority of other member states. This reduced opportunity for political intervention has attracted criticism from Paris, where officials are worried about a loss of influence.

Although theoretically possible under the EU's current system of rules, no commission has ever handed a fine to a national capital for breaching the pact. When Germany and France overshot the limits in 2005, the rules were simply changed to accommodate them.

The tough new system proposed on Wednesday would also apply to governments who breach the bloc's 60 percent of GDP debt limit, with commission monitoring until now predominantly concentrating on excessive deficits.

Divergences in eurozone competitiveness have also come under the microscope this year, with economists questioning the ability of countries with high salaries and stronger pension systems to compete against states such as export-driven Germany where salaries have been kept low.

As a result, the commission plan envisages the creation of a new scoreboard for a list of macro-economic indicators so that member state imbalances can be detected more quickly. Those that fail to right these imbalances over time could be subject to 0.1 percent of GDP fine.

The commission was quick to stress, however, that a wave of fines was not imminent, despite the fact that the vast majority of eurozone members will be in breach of the bloc's budgetary rules for several years to come.

"At the moment Europe is in an extreme situation," said Mr Barroso. "There are exceptional measures in the package to face up to this."

The new proposals specifically refer to countries using the euro currency, but plans are afoot inside the Berlaymont to come forward by the end of the year with a separate package to mop up overspending non-eurozone states.

Economy commissioner Olli Rehn has indicated that these could involve reduced EU payments to non-eurozone states, allowing Brussels to effectively introduce a similar system of fines via a different channel.

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