By Jan Strupczewski
BRUSSELS, Oct 15 (Reuters) - Groups of countries led by Germany and France are likely to clash on Monday over how much say euro zone finance ministers should retain in deciding sanctions for deficit and debt limit offenders.
Finance ministers meet in Luxembourg to complete an overhaul of EU budget rules started in May and to agree on a report for EU leaders on how to make the rules tougher to prevent the next sovereign debt crisis, like that triggered by Greece.
They will also review the outcome of the G7/International Monetary Fund meetings in Washington, particularly the likelihood of so-called 'currency wars', and prepare for the G20 finance ministers' meeting in South Korea at the end of the week.
The euro has jumped 8 percent against the dollar in the last month and 18 percent since June, raising fears that the currency bloc's exporters will increasingly struggle.
But it is the debate on deficit sanctions, the biggest overhaul of the fiscal rules underpinning the euro since the single currency's creation in 1999, which could cause the most fireworks.
The plan backtracks on a reform from 2005, which then gave budget sinners more leeway after Germany and France had refused to accept EU disciplinary action against their bulging deficits.
The executive European Commission presented last month a set of proposals to impose sanctions on euro zone countries breaking the Stability and Growth pact, the EU fiscal rulebook, much earlier and with less ministerial discretion.
"There is a broad agreement on that -- the sanctions, etc. but there are different views on how fast the procedure should be and what should be the role of the Council (of ministers)," said one euro zone source preparing the meeting.
Germany, the Netherlands and Nordic countries would like to see sanctions imposed almost automatically on countries that do not abide by the EU's 3 percent of GDP limit on budget deficits and public debt limit of 60 percent of GDP.
Under the Commission's proposals, only a qualified majority of EU finance ministers could stop the imposition of an interest-bearing deposit, a non-interest bearing deposit or a fine on the offending country, if it keeps overspending.
"But some would like to stick to the current arrangement where the Council has to make a decision each time and it is up to the political discussion in the Council to decide if there are sanctions or not," a second euro zone source said.
This camp is led by France, whose Economy Minister Christine Lagarde said last month a degree of political input into the process was essential and that the fate of a country could not be put totally in the hands of experts.
"France is quite outspoken about this so other countries, which have similar views, don't have to be so outspoken -- they can hide behind France and let Paris do the dirty work," the second source said. Italy and Spain were backing France.
NO NUMBER ON DEBT REDUCTION YET
The Commission also proposed that countries which have debt higher than 60 percent should reduce it by one twentieth of the excess over the limit annually.
Sources said that the ministers' report to EU leaders would not mention any numerical value, just an agreement that debt would have to decline at a "sufficient pace", or the country would be placed under disciplinary action called the excessive deficit procedure, which would now entail sanctions.
"The required speed of the reduction will be specified later, during the drafting of the legislative proposals after EU leaders give their approval at the Oct. 28-29 summit," the first source said.
Sources said there was also an idea to link the pace of the reduction to whether or not a country had a budget close to balance or in surplus -- what the EU calls a medium term objective for fiscal policy.
A further hurdle was the proposed sanctions for countries that do not adjust their excessive macroeconomic imbalances as suggested by the Commission, which some countries thought would give the EU executive too much say over national policies.
The ministers will also seek to agree on a formulation of the Commission's proposal that EU countries should inscribe prudent fiscal rules into national legislation, like Germany or Poland have.
Finally, the ministers will discuss how much to commit themselves to creating a permanent mechanism for crisis resolution in the euro zone in the future.
The 16-country area has so far only agreed on ad-hoc solutions for emergency financing -- an 80 billion euro bilateral loan package for Greece and a 500 billion euro European Financial Stability Mechanism for all euro zone states.
Germany and its backers would like to see a more permanent solution, but both the ministers and the Commission prefer to wait until next year to see how the temporary mechanisms work, to draw on that experience in designing a permanent one.
"There is definitely going to be a paragraph in the report on that, the question is -- is it going to be a general declaration that we are going to have a discussion about or if it is going to be a more precise setting-out of the principle elements of such a scheme in the future," the source said.
(Reporting by Jan Strupczewski, editing by Toby Chopra)