EU governments last night (27 September) agreed on the main elements of a new sanctions regime against member states with poor public finances and irresponsible spending policies.

The elements include sanctioning member states with excessively high levels of debt, making the application of sanctions against member states with high debt or deficit levels almost automatic, and also pursuing member states that do nothing to address persistently poor competitiveness.

The measures were agreed by the EU’s taskforce on economic governance, which is chaired by Herman Van Rompuy, the president of the European Council, and made up largely of the EU’s finance ministers. The taskforce has been charged by EU leaders with agreeing reforms that would prevent any repeat of the EU debt crisis.

“There is an agreement that, in a system where fiscal responsibility remains largely under the
responsibility of national authorities, there is a need for a credible enforcement mechanism at the
EU level,” Van Rompuy said after the meeting.

He said that sanctions against member states with high deficit or debt levels “would be introduced at an earlier stage, be more progressive and rely on a wider spectrum of enforcement measures” than under the EU’s existing rules for fiscal responsibility, which essentially failed in the run-up to the debt crisis.

Van Rompuy said that governments had agreed that available sanctions should include suspension of EU funds, and that the necessary steps to make this sanction available should be taken “as soon as possible”. He did not clarify, however, which funds would be included in this. The step nevertheless marks a defeat for Spain, Austria, Portugal, Greece and Slovenia, which had argued vehemently against suspending funding, on the grounds that it would further damage a country’s weak country’s economic performance.

Van Rompuy said that, “whenever possible”, decision-making concerning sanctions would work on the basis that sanctions proposed by the European Commission would be applied automatically, unless a qualified majority of member states voted against the Commission’s proposal.

No sanctions have ever been applied against a member state under the EU’s existing stability and growth pact, which is supposed to ensure fiscal discipline. The pact allows for a range of sanctions (including fines) to be applied against member states whose deficits exceed 3% of their gross domestic product (GDP). Van Rompuy said there was agreement in the taskforce that sanctions should also apply to member states whose public debt is over 60% of GDP, and whose “path of debt reduction is considered as unsatisfactory”.

He said that member states without debt or deficit problems, but which do not address poor economic competitiveness, will be pursued through an “enforcement framework involving corrective measures”, though governments have yet to agree on the details.

The taskforce agreed that the sanctions regime for debt and deficits would apply, “as a first step”, only to the eurozone, leaving open the possibility that it could be expanded to all member states at a later stage (an idea which is strongly opposed by the UK). 

The agreements reached by finance ministers mirror elements of package of reforms to economic governance that the European Commission will present on 29 September, although the Commission’s package will be far more detailed.

The agreements follow calls yesterday by Jean-Claude Trichet, the president of the European Central Bank (ECB), for the EU to agree far reaching reforms to strengthen economic governance in the EU.  

“Short of an immediate or rapid treaty change, we have to exploit to the maximum all the possibilities for EU secondary legislation,” he added.

The taskforce’s agreements include many of the ECB’s priorities for governance reform, including giving greater emphasis to debt levels and making sanctions “quasi-automatic”.

EU leaders have given the taskforce until next month to agree a comprehensive package of governance reforms, to be presented in a report. The report will be discussed by leaders at a summit on 28-29 October.