Eurozone may review national budgets

Permanent ‘crisis-resolution mechanism’ and EU review of national budgets are among set of proposals to increase co-ordination of economic policies.

The European Commission today (16 April) called for eurozone countries to submit draft budgets for evaluation at EU level.

The issue is highly sensitive for member states, for whom the right to set their own national budgets is an essential part of their sovereignty. The Commission, however, believes the step is essential to avoid a repeat of the Greek debt crisis.

“We are of the view that [governments] should integrate the European dimension into national processes when it can still make a difference,” Olli Rehn, the European commissioner for economic and monetary affairs, said.

“Draft national budgets or broad budgetary outlines…could be subject to peer review by member states before they are approved by national parliaments,” he added.

Rehn’s call received strong support from Jean-Claude Juncker, the president of the Eurogroup, which brings together the finance ministers of the eurozone. “It is of the essence that each of us knows the broad lines of other countries’ budgets,” he said.

He added that governments should have the opportunity to “influence” a budget “which points in a direction that doesn’t seem convenient”.

The increased budgetary surveillance will be one element in a set of proposals that Rehn plans to present on 12 May to strengthen economic governance in the eurozone. Other elements will be the creation of a “permanent crisis-resolution mechanism” that would provide financial aid a eurozone country facing default, improved surveillance of economic imbalances and measures to strengthen the EU’s stability and growth pact, which requires member states to keep their budget deficits to within 3% of gross domestic product.

Rehn said earlier this week that measures to strengthen the pact could include imposing penalties, such as loss of EU structural funds, on countries that repeatedly flout the 3% rule, and even making the application of penalties automatic, rather than subject to discussion by finance ministers. He said some changes could require new require new legislation.

“The latest developments…not least in and around Greece, have shown that there is a pressing and urgent need to strengthen economic policy co-ordination,” he said earlier this week.

Rehn said his plans were justified by evidence that member states are not fully committed to repairing their public finances. He said that governments’ multi-annual deficit cutting plans suffered from a “clear lack of concrete measures, especially for …2011-12”, and that they were based on “rather optimistic macro-economic scenarios”.

Rehn singled out Luxembourg, whose prime minister, Juncker, was sitting alongside him, for criticism, saying that it was the only eurozone country not planning budgetary consolidation in 2011. He said this was “contrary” to Luxembourg’s EU commitments.

Rehn and Juncker were speaking after an informal meeting of eurozone finance ministers in Madrid. Rehn said he was “very encouraged” by the support he had received for his plans at the meeting.

Juncker said ministers had agreed to review the “competitiveness gaps” in the eurozone that have lead to economic imbalances. He said that the Eurogroup would hold regular discussions on the subject at which countries would be examined in turn. He said that the first discussion would focus on Spain and Finland, and the second on Portugal and Luxembourg.

Juncker and Rehn said that their priority was raise standards in countries with weak competitiveness, not to target surplus countries’ export performance – a reference to Germany, whose export-driven economy has contributed to imbalances within the eurozone. “We shouldn’t start by changing the situation in the state Mrs Merkel knows well,” Juncker said. 

He also said that the Eurogroup had agreed that finance ministers should take part in a task-force on toughening up economic and budgetary surveillance that is being set up by Herman van Rompuy, the president of the European Council. Juncker said he would meet Van Rompuy to discuss co-operation between the task-force and the Eurogroup.

Juncker said that most finance ministers had managed to attend today’s meeting despite the grounding of flights across northern Europe due to the eruption of a volcano in Iceland.

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