26 September 2013

Reuters: New era as Brussels tightens its grip on budget miscreants

In one of the most far-reaching responses to the region's debt crisis, the Commission will now run the rule over the budget plans of the 17 eurozone countries before they are fully digested by national parliaments.

The Commission, which acts as a civil service for the EU, will have the right to send back any budget plans it thinks do not make the grade. Countries can ignore its advice, but face tough, rapidly imposed fines if they stray out of line.

The rules underscore just how far power over budget policy has shifted from capitals to Brussels and marks a fundamental change in the way the currency area is run, with a sizeable amount of sovereignty being surrendered - perhaps more than many governments realised at the time. If it works, it may launch the eurozone towards a single finance ministry handling taxation and bond issuance - a once unthinkable scenario that the crisis pushed leaders to consider.

The International Monetary Fund, which has played a central role in euro zone bailouts, backed the idea of a fiscal union in a new report this week, seeing it as a way to underpin an emerging single banking framework for the currency bloc. Under the new rules, countries must submit their draft 2014 budgets to the Commission by October 15. They are then scrutinised for any shortcomings, whether they be unrealistic revenue projections, insufficient spending cuts or base financing that relies more on creativity than reality.

They also face peer pressure to behave. Eurozone finance ministers will hold a special meeting on November 22 to coordinate fiscal policy and ensure everyone is meeting agreed targets. "We are embarking on a new era of economic governance in which the eurozone's credibility will be at stake", said a senior eurozone official who will attend the meeting. It all adds up to a new world order, but one that runs the risk of putting errant countries at odds with the Commission and testing whether governments can submit to a higher authority.

A next step could be a system of binding contracts between the Commission and eurozone countries that set deadlines to deliver budgetary and economic reforms in return for money. Those funds would come from a central pot created by eurozone states that would be separate from the European Union's current budget and which some officials have dubbed a "candy machine", with rewards dispensed for good behaviour.

While that might seem ambitious, it may not be bold enough. "Fiscal coordination is not fiscal union. Reaching it will be a very long and painful process", said Zsolt Darvas at Bruegel, a think-tank providing input to EU policymaking.

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© Reuters