EU takes landmark steps to rein in runaway budgets

(LUXEMBOURG) - European governments took landmark steps Monday to make it easier to sanction states that blow their budgets and create a permanent, Greek-style safety net for those who cannot make ends meet.

Eight hours of negotiations in Luxembourg, after states were accused of getting "cold feet" on promises to ensure the Greek debt crisis would never again be allowed to happen, also ended with European Union president Herman Van Rompuy charged with negotiating treaty change for the bloc.

The initiatives were announced by French President Nicolas Sarkozy and German Chancellor Angela Merkel in Deauville, France, at a summit with Russian President Dmitry Medvedev.

However, Jean-Claude Juncker, the head of the Eurogroup of finance ministers for countries that use the euro, said it was "too early to judge" the dramatic overhaul, warning that the "devil is in the detail."

He pointed out drily that neither Sarkozy nor Merkel were in Luxembourg for the marathon talks, just as neither Juncker nor EU economic affairs commissioner Olli Rehn, at his side, were in Deauville.

"Treaty change is not on the agenda as if it had been said by all 27" EU states, Juncker said.

Nevertheless, the Luxembourg prime minister did label the new direction an "improvement" on the EU's Stability and Growth Pact, neutered in 2003 and rendered meaningless since global recession saw a host of states smash through deficit and debt ceilings over the past year.

Taken together, the changes would easily amount to the most radical rewrite of EU rules since the creation of the euro currency in 1999, once they get through the European Parliament -- which wants even more.

They came about after a huge battle between France and Italy, on the one hand, and Germany and the European Central Bank, on the other, over how rigid, or how flexible, the application of new sanctions including fines should become.

Poland also threw around its weight, winning a major concession to recalculate debt levels with regard to costly pension reform in former communist states, from the "task force" on pan-EU economic governance chaired by Van Rompuy.

The EU leader did not attend a late-night press conference held by Juncker and Rehn, but will present recommendations based on Monday's agreement to national leaders at a full bloc summit next Thursday and Friday.

Europe issued a flood of declarations in the spring about tightening budgetary discipline in a broadly successful bid to calm markets that had been showing signs of panic over the spread of the Greek debt crisis.

But the subsequent fall of the dollar and sterling and talk of a currency "war" with China, which has pushed up European export costs and threatens tentative recovery, had weakened enthusiasm for strengthening cross-border EU powers.

Dutch Finance Minister Jan Kees de Jager said states -- led by Italy, with one of the world's highest public debt ratios -- had got "cold feet" on ideas aimed initially at the soon-to-be 17 euro currency countries.

The eurozone currently comprises 16 members.

Polish minister Jacek Rostowski made it clear that the "only circumstances" under which penalties, including fines, would be acceptable there would be for pension reform costs linked to bloc accession to be stripped out of EU calculations. Poland has yet to enter the eurozone.

Draft task force conclusions said "specific attention should be paid to the impact of pension reforms" and noted Italy wanted "private debt" levels considered.

Non-public debt in Italy is relatively small compared with Britain or Ireland.

But crucially, the task force "made it easier to start sanctions proceedings, and easier to carry them through," according to a Dutch government official who fought long and hard after de Jager was left "flabbergasted" by Germany "switching sides," according to a diplomat.

Sanctions proceedings will now be able to start before a country crosses the three percent of GDP threshold for its public deficit, officials explained, and after it goes through the 60 percent ceiling for its debt -- both of which are key innovations.

Rehn had said ministers faced a "litmus test" that would show "whether states are genuinely for reinforced economic governance or not."

Rejoinders including the need to take into account exchange rates and debt maturity classification were factored in.

But Rehn's commission will come back around the end of the year with fresh proposals resurrecting "second-stage" sanctions to be applied also to non-euro nations, with the exception of Britain.

These include talk of freezing EU payments to support farming or aid to the EU's poorer regions.

18/10/2010 - Remarks by Herman Van Rompuy, President of the European Council, following the last meeting of the Task force on economic governance