EU wants tough sanctions against budget rule breakers

(BRUSSELS) - Europe's budget watchdog proposed new rules on Wednesday to crack down on spendthrift governments with the threat of big fines to prevent a re-run of the spring debt drama.

The European Commission adopted draft legislation to revamp its toothless Stability and Growth Pact, which sets out limits on public deficit and debt levels but failed to prevent the Greek debt drama.

The proposed legislation "will give teeth to enforcement mechanism and limit discretion in the application of sanctions," the commission said.

European Commission President Jose Manuel Barroso said the rules would "mark a sea change in the way economic governance is dealt with in the European Union."

Pressure to tighten the rules rose after a massive fiscal crisis in Greece forced the eurozone to bail out Athens in May and led to the creation of a trillion-dollar war chest to prop up any other weak member state.

Despite the safety net, fears of a new crisis persist as the borrowing costs of Ireland, Spain and Portugal creep up due to concerns about their fiscal health.

"The pressure we have been under since the crisis started shows more clearly than ever that, as the famous saying goes, 'there is no such thing as a free lunch.' There is also no such thing as a free deficit," Barroso said.

Brussels unveiled its proposals on the same day that trade unions organised anti-austerity demonstrations in Europe with tens of thousands of people swarming the Belgian capital.

Under new rules, a state targeted by an excessive deficit procedure would have to place 0.2 percent of its gross domestic product in a non-interest bearing deposit, which would turn into a fine if it fails to fix it.

The commission proposed to change voting rules in order to make it easier for sanctions to pass. The EU executive's recommendation for a sanction would be adopted unless a qualified majority of EU states vote against it.

Nearly every European state exceeds the pact's public deficit limit of 3.0 percent of GDP but the path towards penalties is long and the bloc has never imposed sanctions against any state.

To ensure that states follow prudent fiscal policies, the commission proposed that annual public spending should not exceed GDP growth.

Another measure proposed by the European Commission would punish countries that surpass the EU's debt ceiling of 60 percent of GDP by forcing them to slash the excess by five percent each year for three years.

The commission also unveiled new sanctions to prevent macroeconomic imbalances "that put at risk the functioning" of the European Monetary Union.

A euro area state that repeatedly fails to act on recommendations to correct imbalances would have to pay a yearly fine equal to 0.1 percent of its GDP that can only be stopped by a majority of eurozone members.

Germany and the European Central Bank back the idea of "quasi-automatic" sanctions, but France says it should not rest solely in the hands of experts and that states should have a strong say in any decision.

Barroso called for talks with the EU parliament and states to begin in order that the new system can be adopted "by the middle of next year."

The second biggest bloc in the European parliament, the Socialists and Democrats, said the new rules would lock economies "into a straitjacket."

"For millions of people who have lost their jobs because of the financial crisis, this further turn of the screw will be really bad news. We insist on a more flexible approach," said S&D leader Martin Schulz.

Economic governance package (1): Strengthening 

the Stability and Growth Pact

Economic governance package (2): Preventing 

and correcting macroeconomic imbalances

Economic governance package (3): Chronology 

and overview of the new framework of surveillance and enforcement