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Tighter rules on government deficits - 29/09/2010

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In response to the financial crisis, the Commission has put forward legislative proposals to strengthen and expand existing tools for coordinating economic and fiscal policy in the EU.

The proposals aim to strengthen the Stability and Growth Pact (SGP) – particularly through an increased focus on public debt and fiscal sustainability – extend surveillance to macroeconomic imbalances and make enforcement more effective through the use of sanctions and incentives.

The proposals would not require changes to the EU Treaty, but must still be approved by the Council and the European Parliament.

Monitoring public debt levels

To better make sure that countries respect the SGP rule of not having debt of more than 60% of their GDP, a benchmark for debt reduction would be made operational. EU members with debt ratios above 60% of GDP could become subject to an "excessive deficit procedure" after an analysis of different factors which affect the quality of the debt and the country’s future prospects.

Strengthening national fiscal frameworks

The Commission also proposes to strengthen national fiscal frameworks and align them better with the new governance rules. Reforms could include ensuring consistent accounting, aligning national fiscal rules with EU Treaty obligations, switching to multi-annual budgetary planning and ensuring that the whole system of government finances is covered by the fiscal framework.

Preventing and correcting macroeconomic imbalances

Another lesson learned from the crisis is that fiscal policy should not be looked at in isolation. An improved broader macroeconomic surveillance to avoid large imbalances and big and persistent divergences in competitiveness would therefore include regular assessments and an alert mechanism. Once an alert is triggered, the Commission would make a country-specific analysis and recommendations to the Council on how to tackle the imbalances. It could also issue an early warning directly to the country itself. In particularly serious cases, the Commission could recommend placing a member country in an “excessive imbalances position”, triggering stricter surveillance of corrective action.

Enforcement gets teeth

Stronger enforcement is a major part of the proposals which also foresee a set of gradual sanctions for non-compliant countries. Non-interest bearing deposits would be converted to fines in case of repeated non-compliance.

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