EU flexes muscles on Greece, but how far can it go?

(BRUSSELS) - A grab on Greek budgetary sovereignty this week marks a watershed for cross-border European economic governance, but experts remain divided on how quickly Brussels will be able to flex its muscles.

Europe cornered Greece into preparing drastic new action to rein in bulging debts when EU finance ministers forced Athens to prepare "additional measures" by March 16 to put its finances in order, cutting the Greek government out of the decision-making process.

European Commission, European Central Bank and International Monetary Fund inspectors were also due in Greece to review progress on a commitment to reduce a 2009 public deficit of 12.7 percent of gross domestic product by four percentage points over the course of this year.

A first quarterly report by the Greek government to EU peers is due by May 15.

Together, these developments amount to "unprecedented" measures since the 1999 launch of the euro currency, said economist Jean Pisani-Ferry of leading Brussels political analysts, the Bruegel Institute.

"We have entered an innovative phase," underlined Jesus Castillo, an economist with Natixis, for whom the targeted Greek sovereignty grab "creates a precedent" in terms of EU budgetary surveillance.

"What next," he asked, adding "would (Europe) have the power to adopt such a strict stance with the biggest countries like France?"

Royal Bank of Scotland analysts also clearly stated in a note that "one of the implications of this crisis will be to lead to a greater loss of sovereignty in budgetary questions."

Rules that limit deficit ratios to three percent of national ouput -- ignored by 20 of the 27 EU nations -- have simply not delivered.

"We have rules for prevention, but now we can see that they can be got round and are insufficient," Pisani-Ferry warned.

In his view, increasingly stringent demands on Athens mean Europe is "bit by bit, through improvisation, inventing a piecemeal (system)" for crisis management.

He notes that such an outcome was something EU countries had "deliberately" ruled out before the Greek crisis because "the dominant feeling was that it would serve to incite (fiscal) misbehaviour."

Greece's total debt, estimated at about 300 billion euros, or 113 percent of GDP, is nearly double the 60 percent eurozone limit, illustrating why the likes of France have long argued for an "economic government" for policy-making across Europe.

If the Greek crisis accelerates opportunities envisaged by the idea's supporters, discussions between national capitals remain long-term, based on preparing a new economic strategy with a target date of 2020.

Nevertheless, for Pisani-Ferry, the Greek budgetary surveillance represents "the concrete appearance of one of the elements of strengthened economic governance."

There is no smoke without fire, he believes, saying "we have crossed the line by saying that in certain circumstances we can be obliged to help" countries financially, as EU leaders did at a special summit last week.

"In exchange, we become more demanding in terms of behaviour with an eye on prevention," he added, referring to the cross-border supervision of wider macroeconomic policy-making.

Asked if Downing Street had mixed feelings about the sovereignty grab, after insisting that an effective veto be written into an EU deal to supervise banks, a British official just smiled.

"It will be interesting to see how effective the demands for additional measures are if the Greeks encounter problems politically at home," he said, referring to strikes that followed the EU action.

"The danger must be that the move creates an artificial deadline," he added, arguing that if resistance to tighter austerity becomes channelled, the pressure could yet rebound on Brussels to come up with concrete bailout funding.