Who is in charge of the euro?

Sanctions:

Most of the EU's national governments agree that financial penalties are needed to sanction member states with irresponsible fiscal policies.
Germany is, however, alone in advocating suspension of voting rights in the Council of Ministers for member states that ignore recommendations on deficit reduction. The UK has the most cautious approach, urging exploitation of existing sanctions before creating any new ones.

Under the Maastricht treaty, a member state that fails to keep its budget deficit within the stability and growth pact's ceiling of 3% of gross domestic product can be obliged to publish additional information before issuing bonds and securities. It can also face reconsideration by the European Investment Bank of its lending policy towards the country. It may be required to place a non-interest bearing deposit with the European Commission. And it can be subject to fines. But these sanctions can be applied only where a member state has persistently ignored recommendations to bring its deficit down.

None of these sanctions has ever been applied in practice, both because governments have shied away from imposing financial penalties on countries already in fiscal difficulties, and because governments have proved politically reluctant to impose sanctions on their peers.

The Commission, in a policy paper presented on 12 May, suggested revising the rules, because any penalty under the current rules would “come into play too late to provide the right incentives for member states to tackle emerging fiscal imbalances”. It also suggested expanding the range of sanctions to include interest-bearing deposits and suspension of the EU's structural funds. It has said that sanctions should apply automatically to countries that persistently break the stability and growth pact, without the need for a discussion between finance ministers.

Herman Van Rompuy, the president of the European Council, said last week that “sanctions could already kick in before the 3% threshold for the annual deficit is exceeded”.

The Commission and Van Rompuy's ideas in this area have generally been well received in meetings of the ministerial taskforce, and the Commission is likely to present proposals on them in July.

Van Rompuy and the Commission point out that reforming financial sanctions and rules on when they can be applied do not require treaty changes – something that would be necessary to implement the German proposal to suspend voting rights.

Reducing competitiveness divergence

The Commission has put part of the blame for the eurozone debt crisis on “large and persistent macroeconomic imbalances” between member states. In response, it plans a scoreboard where it will regularly rank member states' relative competitiveness. It also plans to warn eurozone members when their policies do not support their competitiveness, and to submit draft economic-policy recommendations for adoption by finance ministers. Van Rompuy has supported these plans – the least contentious aspect of the economic governance-reform agenda.

Budgetary surveillance

The Commission and Van Rompuy want governments to submit draft national budgets for EU-level review. They see this as an essential preventive measure to stamp out irresponsible fiscal policies before they can cause harm.

The Commission, in its paper on 12 May, called for the creation of a “European semester”, beginning early in the year, when budget plans would be analysed. Each government would submit draft budget details to both the Commission and to the EU's finance ministers. The Commission would give an opinion on each country, and finance ministers would adopt recommendations for changes. France, Germany and most other member states favour this approach, but it is firmly opposed by the UK, while Ireland and Sweden have reservations. The Commission is likely to present proposals in July.

Permanent crisis mechanism

Since the start of the eurozone debt crisis, governments have created a €110 billion emergency loan facility for Greece, a €60bn “European financial stabilisation mechanism” and a €440bn “European financial stability facility”.
With the exception of the €60bn mechanism, these measures are temporary.

The €110bn facility for Greece will expire in May 2013. The statutes of the €440bn facility make it clear that it is a temporary initiative to deal with the debt crisis (see below).

The Commission suggested in its 12 May policy paper that the EU should create a permanent “crisis resolution mechanism” to replace the €440bn facility when it expires, so as to underpin eurozone stability. It envisages this permanent mechanism as an EU rather than an intergovernmental initiative, operating on the model of the Commission issuing debt to finance emergency loans.

Germany has said that it will accept the creation of a permanent mechanism only if it contains a procedure for orderly state insolvencies, but other governments – and the European Central Bank – refuse to countenance allowing any eurozone country to default. The Commission has said that it will make a proposal “in the medium to long term”.

Eurobonds

Van Rompuy has proposed that eurozone countries could carry out a part of their debt issuance in the form of eurozone (rather than national) bonds. This idea, commonly referred to as a eurobond, has been rejected by France, Germany, and several other eurozone governments. Jean-Claude Juncker, the president of the Eurogroup of eurozone finance ministers, is, however, enthusiastic.