Trichet says EU fiscal reform too weak for euro zone

Reuters | Oct 23, 2010 | 9:34pm IST

European Central Bank President Jean-Claude Trichet said on Saturday that new European Union fiscal rules pushed by France and Germany were too weak to safeguard the euro zone. EU finance ministers agreed on Monday to toughen the bloc’s budget rules to prevent future sovereign debt crises after an agreement struck in France between President Nicolas Sarkozy and German Chancellor Angela Merkel, which diluted initial plans.

TrichetGerman magazine Spiegel reported that Trichet had warned French and German officials at Monday’s meeting of European Council President Herman van Rompuy’s taskforce on fiscal reform, that their actions could threaten the coherence of the euro zone. However, Trichet said he had simply stuck to the ECB’s position that semi-automatic sanctions were required to ensure the efficacy of any fiscal pact for the 16-nation currency bloc.

"All that I have said … was that I did not subscribe to all elements of the report by the taskforce," said Trichet, who was himself a member of Van Rompuy’s group. Trichet said there was a huge difference between measures which were appropriate for the 27-nation European Union, and those which would bring stability to the 16-country euro zone, which shares monetary policy and institutions.

"The proposal which was agreed by the Commission and the Van Rompuy taskforce report is only appropriate for the 27. For the 16, we think that it could be more ambitious," Trichet said. The ECB had originally called for semi-automatic punishments for countries running up large deficits, including stopping access to European funding and aid.

Under the proposals approved on Monday rule breakers would only face sanctions after six months after being warned, and a majority of EU states could block any financial penalties being imposed. Germany’s Merkel accepted French demands to give politicians more control over penalties, in exchange for Sarkozy backing German calls to amend EU treaties in the future to strip persistent deficit sinners of voting rights and push for an orderly default mechanism.

It will now take a political decision by a qualified majority of euro zone governments to start disciplinary action against any state with an excessive deficit or debt level, and a majority of countries can still block any financial sanction. ECB Vice-President Vitor Constancio already told reporters in Frankfurt on Wednesday that the central bank wanted tougher rules, a sentiment matched by fellow ECB board member — and one of the architects of Europe’s original fiscal rules — Juergen Stark.

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