EU takes first steps to sanction deficit offenders

(BRUSSELS) - Battling to beat the debt crisis, the European Union took its first step Wednesday towards imposing new penalties on countries breaching budget deficit reduction targets needed to save the euro.

Out of five EU states facing a 2012 deadline to get back within a widely ignored 3.0-percent of GDP deficit threshold, economy commissioner Olli Rehn in the end proposed only to move non-euro Hungary's case "to the next stage."

The other four countries did what was required to avoid penalties.

"Today, after a thorough analysis by my services of the latest fiscal policy decisions of these countries, the Commission concluded that Belgium, Cyprus, Malta and Poland have taken effective action," Rehn said of efforts to correct their excessive deficits.

"This is unfortunately not the case of Hungary," he said.

The EU executive said that the government in Hungary has taken "no effective action" and called on EU finance ministers to slap sanctions on Budapest when they vote on the issue on January 24.

The threat comes as Hungary goes into talks to obtain a 15-20 billion euro ($20-25 billion) lifeline from the EU and IMF after negotiations were suspended in December.

Using new laws that entered into force at the turn of the year, the sanctions would nonetheless would stop short of hard cash penalties -- which would only apply to states in the eurozone.

Rehn's office said that although Hungary "formally respected" the deficit threshold last year, "this is only thanks to one-off measures worth some 10 percent of GDP."

Without a key transfer of private pension funds to the public books, Rehn said the deficit "would have hit 6.0 percent of GDP."

"Hungary has in fact been in excessive deficit ever since its accession in 2004," Rehn said, adding that Budapest had twice been given more time, by a total of three years.

The Hungarian economy ministry differed.

"Numbers speak for themselves: for the first time since our EU accession, the public deficit will be under three percent in 2012," it said in a statement. "We are going to keep the deficit under three percent in 2013 as well."

Pressure could still result in financial penalties, with Rehn reiterating the Commission's position that states could see so-called EU "cohesion" payments worth many billions over coming years suspended "from January 2013."

Rehn underlined: "In the absence of correction from Hungary, I will coordinate any further step in that direction with my colleague Johannes Hahn," in charge of those grants aimed at the EU's poorer parts.

Rehn maintained he was ready to take the new procedures to their logical conclusion, which would see eurozone states docked monies that would in the most extreme cases end up converted into fines.

But after Cyprus, Malta and Belgium from the eurozone escaped punishment -- Poland is not due to take up the single currency until at least 2015 -- it will be next year at least before a eurozone country itself feels EU executive wrath.

Belgium came the closest, but scrambled over recent weeks to make sweeping cuts worth some 11.3 billion euros from its 2012 budget and freeze another billion or more this week on the Commission's advice.

Among the biggest economies, Spain's deadline is 2013. Its 2011 deficit will likely hit 8.0 percent and not the planned 6.0 percent.

Rehn said Madrid had already agreed key measures to correct its slippage and was expected to implement further reforms.

He added: "We can only encourage Spain to take action both in the fiscal and on the structural fronts."

The EU is currently discussing how watertight to make a new fiscal pact covering 26 of the current 27 member states -- Britain is the sole country which has stated it won't sign up the accord.

The latest legal draft seen by AFP shows that planned powers for the European Court of Justice to act of its own volition when budgets stray off course may be curtailed.

'Assessment of budgetary implementation in the context of the ongoing Excessive Deficit Procedures after the Commission Services' 2011 Autumn Forecast