Europe yesterday opened a crucial chapter in its efforts to end the deficits and debts plaguing the euro, with national budgets in the future to come under EU scrutiny before coming into effect.
Drawing from the costly lessons of the eurozone debt crisis, now endangering Portugal and Spain, the EU agreed on a series of steps in the past several months to reassure nervous markets.
Among them is the first ever “European semester,” a program that began yesterday to coordinate economic and budgetary policy in the wake of fiscal disasters that led to bailouts of Greece and Ireland last year.
The initiative brings the EU closer to the elusive goal of economic governance between 27 vastly different countries, ranging from export-driven Germany to farm-heavy France.
“Last year’s developments have confirmed that piecemeal solutions are not enough: We need a comprehensive response,” said European Commission President Jose Manuel Barroso, who described the new system as a “revolution.”
“Europe can only be strong if it is able to act in a coordinated manner, with strong institutions, with a common governance, with stronger economic coordination,” he said last week.
After years of loose book-keeping, Greece shook the euro to its core last year when it revealed a larger public deficit than previously reported, sparking a crisis that led to a 110 billion euro (US$143.5 billion) EU-IMF bailout.
Ireland followed suit last month with a 67 billion euro -financial -lifeline after the government pumped billions into struggling banks, pushing the deficit to 32 percent of GDP, 10 times more than the limit set in EU rules.
In a signal to markets that it would shield the euro for the long run, the EU has agreed to change its core treaty in order to create a permanent financial safety net to help any country in trouble under tough conditions, replacing a temporary 750 billion euro fund expiring in 2013.
However, to avoid being forced into shelling out more cash for spendthrift member states, the EU decided to raise the threat of sanctions against countries that run excessive deficits and debts.
Under the EU’s Stability and Growth Pact, countries must keep their public deficits under 3 percent of GDP, but most countries currently exceed the limit.
The EU will now get to review national budgets before they are adopted by legislatures.
The European semester’s six-month cycle began yesterday when the European Commission was to unveil an “Annual Growth Survey” on the impact of the crisis on the economy, employment, public debt and growth prospects.
The report will be used in March by the European Council to provide policy advice to individual member countries.
National governments will then have to present their medium-term budgetary strategies in April. In June and July, the council and commission will issue recommendations before states finalize their budgets for the following year.
The reform was formally adopted in September last year after overcoming concern from reluctant countries, including the UK, worried about keeping their fiscal sovereignty intact.
“To me, this exercise will lead to a colossal transfer of responsibilities,” Italian Finance Minister Giulio Tremonti told French financial daily Les Echos.
“With a common currency, we no longer can lead 27 different budgetary policies,” he said.
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