Brussels demands yet more austerity from member states

In a show of cross-ideological unity, a trio of Europe's top civil servants, the centre-right President Jose Manuel Barroso, liberal economic and monetary affairs commissioner Olli Rehn and left-wing employment chief Laszlo Andor outlined the plans in the European capital.

Mr Rehn told reporters that "rigorous" cuts and "structural reforms" were necessary for Europe to emerge from its ongoing debt crisis and return to growth.

"Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscous circle of high unemployment, high debt and low growth," he said.

"Without intensified fiscal consolidation across member states, we are at mercy of market forces," he warned.

The commission said that "bold" and "resolute policies" are needed to turn around weak projected growth of around 1.5 percent for the EU over the next ten years and 1.25 percent for the eurozone.

Brussels wants to see further cuts to budgets in 2012 on welfare reform - including more conditionality attached to benefits, and a raising of the "premature" retirement ages. Labour markets should also be made more flexible and "strict and sustained wage moderation" should be maintained.

"In 2011, we need to get our act together. We need to break the vicious circle of unsustainable debt, disruption in the financial markets and low economic growth in some member states," said President Barroso.

"We face a simple choice: a decade of debt or a generation of growth."

Mr Andor for his part suggested that member states may want to index retirement ages to life expectency.

Pension reforms however have proved highly controversial, with mass strikes in France over retirement age changes last year paralysing the country.

The trio also called for more rapid restructuring of banks, a broadening of domestic tax bases and a move away from tax on labour toward indirect taxation.

At the same time, the commission suggested that countries with large current-account surpluses should work to boost domestic demand as well.

The three also called for a hike in the effective lending capacity of the EU's bail-out mechanism, amid growing fears that the eurozone's rescue fund might be insufficient should Spain or Belgium knock on its doors.

However, reacting to the suggestion, both France and Germany declared the current fund was big enough.

Following the publication of the ‘European Semester' recommendations, EU governments will in the spring consider the proposals.

If EU premiers and presidents accept the commission's strategy at their March summit, they will then have to take on board the guidelines in developing their budgets for 2012.

Afterward, while the commission and the European Council cannot block a national government's budget if it does not adhere to the recommendations, they can issue alerts, sanctions and, for eurozone countries, annual fines of 0.2 percent of a country's GDP. Non-compliance for three consecutive years with European Semester demands may result in fines of up to 0.5 percent of GDP.

Based on 2009 figures, for a country the size of Spain, such a fine would amount to €5.25 billion.

Such a shift in control over domestic spending decisions to the European level is not without controversy. While the commission on Wednesday stressed how "the new framework represents in no way a limit to the sovereignty of national parliaments," Mr Barroso himself remarked that while member states were "now ready" to embrace EU-level economic governance, "two to three years ago, they were not."

'Collision course with democracy'

The commission's proposals instantly provoked shock and outrage from trade unions.

Denouncing what he called "Diktats ... being issued that are designed to lower living standards," John Monks, general secretary of the European Trades Union Congress accused commission officials of "ignoring social dialogue and collective bargaining processes and directly intervening in the labour markets of these countries."

"The EU risks putting itself on a collision course with democracy," he added.

The European Federation of Public Sector Unions called the commission's strategy "appalling" and went so far as to say it "will oppose any further progress towards the internal market and EU integration until a substantial social agenda is introduced"

EPSU deputy chief Jan Willem Goudriaan said the plans will encourage workers to begin opposing the EU: "It will increasingly be difficult for workers and their unions to support the EU process if consistently used to undermine their positions and weaken their rights, and now even reduce pay."

The Greens in the European Parliament were also quick to denounce the proposals as "neo-liberal" and "socially blind".

"The commission has continued with its blinkered focus on austerity as the answer to Europe's economic woes," said the group's economic spokesman, Philippe Lamberts.

"The flawed neoliberal approach has clearly showed its limits, yet the commission wants member states to persist with and intensify austerity measures ignoring their potentially negative macroeconomic impacts, as well as the consequences for wages and welfare," he added.

The centre-right European People's Party however cheered the recommendations.

"I welcome the start of the European Semester because it's the first tangible step to real economic governance in the EU," said Jyrki Katainen, vice-president of the EPP and Finland's finance minister.

"If we manage to co-ordinate our efforts through this new process, the EU will become stronger and more resilient to potential pressures from the world markets," he said.