LUXEMBOURG, Oct 19 (Reuters) - European Union finance ministers agreed on changes to EU budget rules on Monday in the hope of regaining market trust and preventing another sovereign debt crisis like the one triggered by Greece.
The agreement on the new rules has to be approved by EU leaders on Oct. 28-29 and fleshed out with further details in November, before being reviewed by the European Parliament.
The European Commission, the EU's executive, hopes to have the new rules in place in mid-2011, but the chairman of euro zone finance ministers, Jean-Claude Juncker, expects they will only be operational from 2012.
Below are the key elements of the agreement to update and change the EU's Stability and Growth Pact.
WHO WILL BE AFFECTED?
The tougher rules will apply only to euro zone countries, but all 27 EU member states will also develop over the next 2-3 years ways of penalising budget ill-discipline among non-euro zone members, with the exception of Britain.
The sanctions for countries outside the euro zone would be linked to suspension of pay-outs of EU funds to member states and should take shape in time for the next multi-annual EU budget framework that will start in 2014.
HOW MUCH WILL IT HURT?
The ministers did not agree on Monday on any numbers for fines or deposits, rates of decline or any other numerical values that could be used as a means to enforce the rules. Such details will be agreed on after EU leaders give their approval to the framework agreement.
However, the European Commission has proposed that interest bearing deposits, non-interest bearing deposits and fines for excessive deficits and debt should be 0.2 percent of gross domestic product (GDP) and 0.1 percent of GDP as a penalty for allowing macroeconomic imbalances to develop. These numbers are likely to be adopted later, sources said.
BEFORE TROUBLE STARTS
The Commission will monitor the economies of the 27 EU countries using a scoreboard of indicators with alert thresholds that vary for euro zone and non-euro zone countries. The list of indicators used by the Commission will be endorsed by EU finance ministers and updated.
This analysis may lead euro zone finance ministers to declare a euro zone economy to have "excessive imbalances" and to recommend action to be taken by a deadline.
The policy recommendations could address fiscal, wage and macro-structural as well as macro-prudential policy areas.
If a country repeatedly -- twice or more -- ignores the recommendations, it should face sanctions.
TROUBLE BEGINS
Under the current rules, a euro zone country can be fined for repeatedly running a deficit higher than 3 percent of GDP and repeatedly ignoring EU finance ministers' recommendations to bring it down below that level. This could take years and has never happened yet.
There is also no enforcement mechanism to make countries move towards a budget close to balance or in surplus, which is the agreed medium term objective of all EU countries. The rules say countries should cut their budget deficits by at least 0.5 percent of GDP a year in structural terms, again with no enforcement mechanism.
Under the new rules, sanctions would begin at once if a country "deviates significantly from the adjustment path foreseen in the Stability and Growth Pact" even if the deficit is smaller than 3 percent of GDP. What would constitute a "significant deviation" in terms of numbers is to be decided in coming months.
MORE EMPHASIS ON DEBT
Until the Greek debt crisis, debt levels in the euro zone had not attracted much attention. The crisis has changed that.
- Countries that have debt above the EU limit of 60 percent of GDP will have to move towards a budget close to balance or in surplus faster than those with lower debt.
- If debt does not decline at a satisfactory pace, even a budget deficit below the EU limit of 3 percent of GDP would not be enough to stop the EU's disciplinary steps against a country -- and that involves financial sanctions.
- In assessing the need for debt reduction, the Commission will take into account all relevant factors such as low nominal growth, risk factors linked to the structure of debt, private sector indebtedness and implicit liabilities related to ageing.
A numerical value of what is a satisfactory pace will be decided later, probably over the next two months.
HOW WOULD IT WORK IN PRACTICE?
- If a country "deviates significantly" from its deficit adjustment path the Commission would issue a warning. The Commission would recommend what steps it needs to take and when. Within one month, EU ministers would adopt recommendations and deadlines for the country on the basis of the Commission's suggestions with a qualified majority of votes.
- Five months later, the Commission would assess whether the country had done as it was asked. EU finance ministers would either agree or disagree with the Commission through a qualified majority vote (weighted by population). If they agreed required policy changes had not been made, the country would have to make an interest-bearing deposit as a penalty and only a qualified majority of ministers could stop that.
- The whole process should not take more than 6 months and the 5-month period between ministers' recommendations and the assessment as to whether they had been adhered to could be shortened to 3 months if the Commission believed the situation was particularly serious.
THE SCREW IS TIGHTENED ...
Once the budget deficit became higher than 3 percent of GDP, the country would be placed in a disciplinary EU procedure, called the excessive deficit procedure (EDP) and the interest-bearing deposit from the stage before would stop accruing interest.
If there was no interest-bearing deposit from the previous stage, there would again be a qualified majority vote by the ministers on recommendations and deadlines from the Commission and an assessment of whether those were adhered to after 5 months.
AND TIGHTENED ...
If ministers agreed the country had ignored their recommendations, the non-interest bearing deposit would be changed into a fine -- a process only a qualified majority of ministers could stop.
If the country continued to ignore the recommendations, the fine could be increased, but this time only if a qualified majority of ministers backed such a move.
The deadline for taking effective action can be reduced to 3 months from 6 months if the situation warrants it.
NEW RULES DO NOT APPLY TO THE PAST
Already 24 out of the EU's 27 members are under the EU's disciplinary budget rules. The new sanctions, however, would not apply retroactively and there would be a transition phase for some elements of these proposals.
NATIONAL FRAMEWORKS
To standardise national fiscal frameworks, the ministers agreed that they should all meet a set of minimum requirements no later than the end of 2013. The minimum requirements would concern public accounting systems and statistics, numerical rules, forecasting systems, effective medium-term budgetary frameworks and adequate coverage of general government finances.
SANCTIONS FOR BAD STATISTICS
Sanctions could also be considered for countries which repeatedly failed to get their statistics validated by the European Statistics office Eurostat.
(Reporting by Jan Strupczewski; Editing by Ruth Pitchford)