New EU rules to guide economy

NEW EU rules that will closely guide eurozone governments’ management of their economies were agreed by finance ministers in Luxembourg last night.

They will be backed up by penalties for those who fail to heed advice on a range of aspects including budget deficits and debt.

This is the biggest change to the governance of eurozone countries since the creation of the single currency more than a decade ago.

While some of the enforcement is not as strict as the region’s biggest country, Germany, wanted, it goes much further than many countries, including France and Italy, wanted.

The final details were still being worked on last night by officials, but finance ministers from the 16 eurozone countries agreed about 16 pages of tightening up the bloc’s economic governance.

Up to now the emphasis was on countries keeping their budget deficits to below 3% of GDP, with the need to keep debt to within 60% of secondary importance. Now both will have equal status and countries must work to bring both debt and deficit into line. Most EU countries are in excessive deficit with the debt of some countries well over 100%.

The second part of the governance concerns economic imbalances which are seen as forewarning on pending trouble in a country’s economy. These include current account balance that encompasses trade and investment, net foreign asset position, real effective exchange rate based on unit labour costs, real effective exchange rate based on GDP deflator, real house prices, private credit to GDP ratio, and government debt.

Even if a country is keeping to within the 3% budget deficit limit, the experts in the European Commission might decide, based on warning signs from these indicators, that a country needs to take action in a specific area.

In that event the Commission will recommend to the Council of Finance Ministers that the country be asked to take specific action.