EU seeks more powers over national finances

The eurozone’s member states are being challenged to pool their economic decision-making powers, to prevent a repeat of the current debt crisis.

When the finance ministers of the national governments meet on Tuesday (18 May), they will be faced with proposals for further enhancing the powers of the EU to police national finances.

The proposals, from the European Commission and Herman Van Rompuy, the president of the European Council, come in the wake of a historic agreement reached by EU finance ministers in the early hours of 10 May to fight off the threat of a eurozone debt default.

The minister agreed on a fund of potentially €750 billion to support eurozone countries in danger of defaulting on their loans.

The European Central Bank (ECB) on Monday (10 May) began, for the first time in its 12-year history, purchasing eurozone government bonds to help countries refinance their debts.

Today the ECB will issue six-month loans to the banking sector at a fixed interest rate in an effort to maintain bank liquidity. Three-month loans will be issued on 26 May and 30 June.

Olli Rehn, the European commissioner for economic and monetary affairs, is today(12 May) publishing the Commission’s proposals to strengthen economic governance. They will include the creation of a permanent “crisis resolution mechanism” to take over when the temporary mechanism agreed on 10 May expires in three years’ time. Rehn’s proposal will be for the EU to issue debt (under Commission management) to finance emergency loans. His proposal is likely to face resistance from member states if it involves increasing the EU budget or directly guaranteeing EU lending. Germany and the UK firmly opposed this latter option during the finance ministers’ discussions on Sunday night.

Rehn will also propose that governments should submit draft budgets to the Commission and Council of Ministers for evaluation prior to their presentation to national parliaments. He will propose the application of sanctions against member states with irresponsible fiscal policies. These would include the suspension of EU cohesion funds and the requirement to place a non-interest bearing deposit with the Commission. The Commission would draw up a scoreboard of member states’ relative competitiveness, and member states with poor competitiveness would receive recommendations from other governments, and, if necessary, formal warnings.

José Luis Rodríguez Zapatero, Spain’s prime minister, will today announce to the Spanish parliament additional austerity measures that his government will take. At Sunday night’s meeting, both Spain and Portugal promised that at Tuesday’s meeting, they would be presenting additional measures to consolidate their public finances. Both countries were last week targeted by the financial markets as likely victims of contagion from Greece’s problems.

Rehn’s proposals are primarily focused on the eurozone, but a task-force reporting to Van Rompuy will make proposals later in the year applicable to the whole of the EU.

Van Rompuy will chair the inaugural meeting of the task-force on 21 May. When the idea of creating such a task-force to reinforce economic governance in the EU was agreed by EU leaders on 25 March, it was asked to report by the end of the year. At an emergency summit on Friday (7 May), eurozone leaders called for its work to be accelerated, and Van Rompuy is now aiming to have its report available in time for a gathering of EU leaders in October.

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