Sunday 18 March 2018

Germany bows to call for political sway on sanctions

ECB President Jean-Claude Trichet is calling for tougher enforcement of fiscal rules. Photo: Bloomberg News
ECB President Jean-Claude Trichet is calling for tougher enforcement of fiscal rules. Photo: Bloomberg News

Germany bowed to France’s call for more political control over sanctions on deficit-plagued euro-area governments, softening its drive for automatic penalties, according to three European officials and a draft document.

Germany, the biggest contributor to this year’s €860bn of loans and pledges to stabilise the euro, agreed to build in an extra layer of political decision-making before sanctions are imposed, the officials said today at a meeting of finance ministers in Luxembourg.

“A lot of member states are getting cold feet now” about making sanctions virtually automatic, Dutch Finance Minister Jan Kees de Jager told reporters before the meeting.

As the euro rises and bond yields in Greece and Spain slip from highs hit after the debt shock, pressure to fix the system has eased, undermining pleas by Germany and European Central Bank President Jean-Claude Trichet for tougher enforcement of fiscal rules.

No country has been fined in the euro’s almost 12-year history for overstepping the European Union’s deficit limit of 3pc of gross domestic product. Greece, the trigger of this year’s debt crisis, went the whole period with a deficit over the threshold.

Under European Commission proposals, countries that flout fiscal targets would have to marshal a majority of fellow euro- area governments to escape fines as high as 0.2pc of GDP.

Under a compromise promoted by France, European governments would give deficit sinners a last chance to fix their budgets before sanctions kick in. Deadlines weren’t spelled out in a draft paper obtained by Bloomberg News.

‘Massive atrengthening’

“Look at the whole picture: it’s a massive strengthening of the pact,” French Finance Minister Christine Lagarde said.

Proposed annual reduction targets for countries with debt over the limit of 60pc of GDP were left out of the draft compromise, to be decided later.

Resistance also mounted to commission calls for penalties on countries with “excessive” macroeconomic imbalances such as outsized current-account deficits.

Finance ministers will tackle the “precise quantitative criteria, methodology and phasing-in provisions for assessing whether debt is declining on a satisfactory pace” when crafting the legislation starting next month, the draft compromise said.

That language marked a victory for Italy, weighed down by debt of 115.8pc of GDP as of 2009, the highest in the 16-nation euro region.

Summit endorsement

While countries such as the Netherlands and Slovakia pressed for tougher sanctions, Germany eased its stance in the face of an end-of-October deadline to overhaul the euro’s economic management. EU leaders are slated to endorse the package at an October 28-29 summit.

The euro has rallied after reaching a four-year low of $1.1877 on June 7. It traded at $1.3907 at 2:45pm Luxembourg time.

The euro is 20pc overvalued, a Bloomberg index of the relative buying power of world currencies shows.

In an echo of the debate before the euro’s launch in 1999, the ECB -- without a vote on the reshaping of the rules -- made the case for a tighter leash on countries with lax budgets.

“More ambitious reforms are needed,” Trichet said on October 16 in Marrakech. He lobbied for “greater automaticity, accelerated timelines and reduced room for discretion in procedures.”

German retreat

As the Greece-led debt crisis forced European governments and the ECB to take emergency steps to rescue the euro, Germany had demanded automatic penalties for future deficit violators. Finance Minister Wolfgang Schaeuble floated the prospect of expelling repeat offenders from the currency union.

Germany dropped that demand and also failed to win EU endorsement for a permanent crisis-resolution mechanism, something that was left to the next stage of discussions because it would require an EU treaty change.

“This is now the moment of truth for the EU member states -- whether they are genuinely for reinforced economic governance or not,” EU Economic and Monetary Commissioner Olli Rehn said.


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