ECB chief opposes new EU budget rules

AP News
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Posted: Oct 21, 2010 3:11 PM
ECB chief opposes new EU budget rules

The European Central Bank's chief does not support all the proposed new eurozone budget rules that leave penalties for overspending nations up to EU governments, who in the past have shown themselves unwilling to impose any.

The draft plan _ put together by a task force of EU finance ministers, EU President Herman Van Rompuy and ECB chief Jean-Claude Trichet _ was published Thursday.

Crucially, it includes a disclaimer that Trichet "does not subscribe to all elements" of the proposed economic governance package.

An ECB spokesman declined to say what parts Trichet does not endorse.

A spokesman for Van Rompuy, who led the task force, said Trichet asked for the footnote to be included on Wednesday.

EU heads of state will discuss the proposed rules at a summit next week. After that, they must be approved by the European Parliament.

The economic governance proposals form part of the bloc's efforts to avoid another government debt crisis like the one that has grasped nations including Greece, Ireland and Spain.

The rules spell out penalties against nations that violate or come close to breaking EU limits on public deficits and debts of 3 percent and 60 percent of gross domestic product, respectively.

But before the European Commission, the EU's executive, can impose fines a clear majority of eurozone governments must vote on whether a nation has run afoul of the rules _ a condition giving governments a firm hand on the wheel of the eurozone.

The European Commission has said it will continue to push for automatic fines for overspenders. In that case, governments will effectively have less power to stop sanctions.

Ceilings for eurozone government deficits have existed for years, but were repeatedly flouted without consequences. Several EU states _ including Finland, Sweden, the Netherlands and, initially, Germany _ had pushed for the commission to get more power to penalize overspenders.

However, Germany softened its stance on automatic penalties, after it won support from France for changes to EU treaties that would allow for a permanent crisis resolution mechanism.

Such a mechanism would force creditors to shoulder some of the costs if a nation can no longer service its debts. Any changes to EU treaties are likely to take several years, since they require the backing of all 27 member states.

Berlin had pushed for a mechanism that included bond holders after it had to put up billions of euros for emergency loans for Greece and a wider eurozone rescue fund. The fund and the Greek emergency loans are set to expire in 2013.

Germany's turnaround on automatic sanctions has come under fire from some in the Free Democrats, the junior partner in Chancellor Angela Merkel's governing coalition, and the German press.

The Free Democrats' leader, Foreign Minister Guido Westerwelle, said that sanctions "should be clear, they must not be subjected to political opportuneness, because otherwise deficit proceedings will be opened but there will never be consequences."

When asked about Trichet's reservations Thursday, Merkel defended the task force's plan.

"I just think that significant parts of the Commission's proposals were also accepted by the task force," Merkel said in Berlin. "And for us it is now important that we don't stand still but take a step forward _ and above all make provisions for the future, when the current rescue funds no longer exist."

Merkel downplayed criticism from the Free Democrats, saying there had been no argument inside her Cabinet.

She received some backing from the prime minister of Estonia, which in January will become the 17th member of the eurozone.

"If a treaty change will be needed _ I'm sure it will be needed _ then of course Estonia will support treaty change also," Andrus Ansip said after meeting Merkel in Berlin.

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Associated Press writer Geir Moulson in Berlin contributed to this report.