- Associated Press - Wednesday, September 29, 2010

BRUSSELS (AP) — The European Commission proposed new penalties for countries that spend themselves into debt in hopes of preventing another crisis like the one that pushed Greece ot the edge of bankruptcy and shook confidence in the euro.

A key proposal Wednesday would be to force countries to set aside 0.2 percent of their gross domestic product if they run up too much debt.

That may not sound like much but could run into billions depending on the size of the country.

The set-aside would be put into a noninterest-bearing account and converted into a fine if the country does not comply with EU recommendations to bring debt down toward the official limit of 60 percent of GDP or the annual budget deficit down to the 3 percent threshold.

The new proposals come after a debt crisis that showed an older set of rules aimed at supporting Europe’s monetary union lacked teeth.

EU member governments never gathered the will to fine other eurozone members when they ran budget deficits that broke the limits.

The old rules’ inability to keep governments from overspending was underlined when it took a last-minute bailout from the other eurozone governments and the International Monetary Fund to keep Greece from defaulting on its government debt in May.

Greece’s annual borrowing in 2009 was more than four times the 3 percent limit, while its overall debt burden was around double what the rules prescribed.

Though recession and the global banking and financial crisis clearly had an impact, much of the country’s problems lay in years of lax budgetary controls beforehand.

This time, the Commission is proposing that it will be the one to pass judgement on whether a country is punished. Member countries would then have to vote to prevent the sanction, as opposed to the previous Stability and Growth Pact (SGP) when they were judge and jury.

“For member states of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions,” the Commission said. “In other words the SGP will become more ‘rules based’ and sanctions will be the normal consequence to expect for countries in breach of their commitments.”

The Commission said the package it is presenting contains “the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the economic and monetary union” in 1999.

The Commission said its proposals are compatible with the existing Treaty of Lisbon and would therefore not require a new treaty. However, the proposals are not yet law and have to be passed by the European Parliament and national governments.

Germany and the Netherlands appear to favor tough new rules, but a number of countries, including France, have voiced unease at the prospect of handing over greater fiscal powers to the Commission.

France’s Finance Minister Christine Lagarde reiterated her view Wednesday that national governments, and not unelected bureaucrats, should have the overriding say in any decisions over fines and sanctions.

She told a press briefing in Paris that the French position was “very clear: in favor of strengthening the stability and growth pact, but not at the price of removing all political input…France considers that politicians must have a say.”

Finance ministers of the 16 countries that use the euro meet Thursday, followed later in the day and on Friday by the wider 27-nation EU.

Analysts doubt that the Commission’s proposals will get universal support and given the likely opposition from France and others, a watered-down new rulebook will eventually be agreed.

“France isn’t on board with this, while those running bigger debts or deficits — no names required — are shuffling about in the corner hoping not to get asked any awkward questions,” said David Lea, western Europe analyst at international business risk consultancy Control Risks.

“I think we might have a case of Death by Member State here, as the proposals are amended into blandness,” said Lea.

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