Luxembourg, 19/10/2010 (Agence Europe) - “Habemus novum pactum”. This is the comment made by the Italian minister for finance, Giulio Tremonti, when he described the political agreements reached at the beginning of Monday evening, by the economic governance-working group, guided by the President of the European Council Herman Van Rompuy (EUROPE 10238). It was reached just before the discussions at the Council on revising the Stability and Growth Pact (SGP) within the limitations of the existing treaties. The pact will be applicable as from 2012 and includes the possibility of introducing sanctions as upstream and as automatically as possible against any Euro zone country that has failed to rein in its deficit or public debt or has been unable to manage its macro-economic imbalances.
This situation was unblocked in Deauville (France) where France and Germany managed to find common ground (in a backdrop to the tripartite summit with Russia) on procedures for introducing sanctions against member states and on other work involving the setting up of a permanent crisis resolution mechanism - see complete text of franco-german statement in annex. This supplementary work will require an amendment of the European treaties. The task force's report will be sent to the European Council, which meets next week.
One European source indicated that, “for the first time, we have the possibility of imposing sanctions during the preventative phase of the Pact”. Even if a member state's budget has not yet reached the 3% of GDP limit, it could be subject to sanctions. Following a warning from the European Commission, the country in question would have six months to take appropriate measures. If these proved insufficient, the Commission would be able to propose financial sanctions, such as a compulsory financial deposit or fines. The Franco German Deauville declaration confirmed that, “in the implementation of the preventative section of the pact, the Council must be able to decide, at qualified majority voting, whether to gradually impose sanctions in the form of deposits subject to interest, when the trajectory of budgetary consolidation of a member state deviates in a particularly significant manner from the adjustment trajectory planned on the basis of the pact”.
On the basis of the corrective stipulation in the pact, sanctions could be taken very quickly if the country concerned has already been subject to a procedure in the framework of the preventative section of the pact. If this is not the case, a six-month deadline will be granted to the country in question, to enable it to take the necessary measures. It should be noted that the Van Rompuy task force's report does not indicate what level of sanctions are planned. Several diplomats appeared to suggest that the figures put forward by the Commission (e.g. a 0.2% of national GDP) do not seem to be controversial.
Decision-making. The solution found for procedures sanctioning euro zone countries infringing European legislation, constitutes a middle ground solution between countries like Germany and Sweden, supported by the European Commission, advocating an almost automatic imposition of sanctions, and countries like France, which would like to see a significant discretionary margin of manoeuvre for the ministers in question. The opening up of procedures, with regard to both preventive and corrective aspects would continue to be based on the customary qualified majority voting. The same European source interpreted this as, “if we want to change this, it will be necessary to change the treaties”. If the national measures taken do not produce the intended effect, the Commission will be able to propose financial sanctions, which the Council would not be able to oppose unless it met and decided by qualified majority voting to oppose these sanctions. In a press release, the president of the European Council, Herman Van Rompuy, confirmed that, “For the decision on all new sanctions, the so-called reversed majority rule will apply…I was impressed by the determination of the Member-States to impose these self-constraints on themselves”.
The Eurogroup president, Jean-Claude Juncker, stated that, “sanctions will be much more automatic… and will take place much more swiftly than they currently do”. The European Commissioner for economic and monetary affairs, Olli Rehn, said that he was satisfied with progress accomplished, which has generally been on line with the position of the European Commission.
Macro-Economic Supervision. The setting up of a mechanism for micro-economic supervision, which will help detect, “real estate bubbles”, national balance of payments imbalances and significant slippage in competitiveness in the euro zone, constitutes the greatest innovation achieved, in the opinion of Mr Van Rompuy, who pointed out that, “these risks were ignored during the first decade of the euro”. The Commission will proceed to an annual assessment of competitiveness developments in Euro zone countries. This will be based on a list of indicators, which will be elaborated during negotiations on the legislative package presented by the Commission (EUROPE 10225). A country confronting micro-economic imbalances will be subject to inspection missions, whose results will be made public and discussed by the European Council. The same European source said, “imagine what this would mean in terms of reputation?” If this process does not prove sufficient, the member state at fault will be exposed to financial sanctions to be decided according to the reverse qualified majority rule.
Public debt. The revised pact will focus more on public debt. With regard to following up debt evolution, “the choice must be made between two proposals”, indicated our European sources: - on the one hand, the Commission will deem the public debt reduction project sufficient when the part of the debt above the 60% GDP threshold decreases at an annual rate of 5%; - on the other, the current system requires that the debt reduction trajectory respects the mid-term objectives. Mr Rehn underlined that, “during the past two years, twenty years of budgetary consolidation has been wiped away” and average national debt has increased over the same period from 60% to almost 90% of GDP.
The report from the working group also mentions another provision to strengthen economic governance in the EU and upon which an agreement had already been legislated upon at the European Council: the creation of the European Semester. As from 2011, member states will present the main guidelines of the national budget in the first half of each year. This will help national parliaments get a better idea of the “European stakes at play” regarding their budget proposals, explained our European source.
Other work. The ministerial workgroup also agreed on the need to continue work for setting up a permanent midterm financial crisis management framework for sovereign debt in the euro zone. Mr Van Rompuy said that this mechanism should be able to, “tackle serious financial situation is and prevent country to country contagion”. It should also help to avoid “confidence risks” and suggests that mechanisms must be implemented ex ante. Other questions to tackle involve conditions for activating such a mechanism, as well as co-operation between the EU and the IMF.
This project area suggests that amendments to the treaties will be necessary but which in their current form rule out any financial support between member states (“no bail out clause”). This has not prevented the creation last spring of two temporary mechanisms for supporting Greece and a preventative mechanism for the Euro zone. In their declaration, Germany and France state that this institutional revision would be necessary in order for a “permanent and robust” mechanism that would guarantee a clear process for tackling future crises. It would also help promote the coordination of decisions taken by member states in view of guaranteeing financial stability. The two member states also want to look at ways of suspending the voting rights of a state guilty of breaching European rules. On these two subjects, they are calling on Mr Van Rompuy to produce proposals by March 2011 in view of treaty reform for 2013. Mr Juncker agreed that setting up a permanent crisis management framework might involve a revision of the treaties but, “this is not explicitly affirmed (in the report) that the treaty would have to be changed”. (M.B.)