Eurozone to discuss reform plans

Finance ministers will this evening attempt to agree strengthening of economic governance.

Eurozone finance ministers will this evening (17 May) attempt to agree a major strengthening of economic governance in the single currency bloc, in an effort to convince markets of their determination to beat the debt crisis.

Ministers will discuss a package of governance reforms presented last week by the European Commission. They include that the Commission and finance ministers should scrutinise countries’ draft budgets before they are submitted to their national parliaments, and that member states that pursue irresponsible fiscal policies should be hit with sanctions. These would include a suspension of EU structural funding, and having to place a non interest-bearing deposit with the Commission.

The Commission said the reforms were needed to ensure that member states repair their battered public finances and pursue policies that lead to sustainable growth.

The budget plans have come in for criticism from Fredrik Reinfeldt, Sweden’s prime minister, who believes that they intrude too far into national sovereignty. “I will object to this way of looking at things,” he has said. Other member states are believed to share his concerns.

Fall in value

Market concerns about the poor state of the eurozone’s public finances this morning drove the value of the euro against the dollar to 1.2299, its lowest level since 2006. The single currency lost 5% of its value against the dollar over the course of last week.

Jean-Claude Trichet, the president of the European Central Bank (ECB), is calling for a “quantum leap in the governance of the euro area.”

“There need to be major improvements to prevent bad behaviour, to ensure effective implementation of the recommendations made by peers, and to ensure real and effective sanctions in the case of breaches,” Trichet said in an interview with Der Spiegel today.

At the meeting, Trichet will also call for member states to increase the pace of their budgetary consolidation, in order to convince the markets that they are serious about delivering sound public finances. “We must now demand extensive adjustment programmes from the governments,” Trichet said.

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Jürgen Stark, a member of the ECB’s executive board, said this weekend that a €750 billion financial support facility, agreed by ministers on 10 May to support eurozone countries in difficulty, had only “bought governments time” with the markets.

This message was echoed by Angela Merkel, Germany’s chancellor, at a meeting yesterday of the German Federation of Trade Unions. “We’ve done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual eurozone countries,” she said.

“If we simply ignore this problem, we won’t be able to calm down this situation,” Merkel added.

Germany is expected to call for member states to adopt legislation committing themselves to keep their budget deficits within a certain limit. Germany already has such a law, the Schuldenbremse, which prohibits the federal government from running deficits of more than 0.35% of gross domestic product from 2016. Austria and France are known to support the idea.

Christine Lagarde, France’s finance minister, said this morning that more attention should have been paid to past German calls for eurozone countries to reduce their debt and deficit levels, and for a stronger enforcement of EU fiscal rules.

The International Monetary Fund warned in a report on Friday (14 May) that “it is now urgent” for developed countries to put in place measures to cut their deficits. The report warned that failure to act could lead to “sustainability problems”.

This evening’s eurozone meeting comes ahead of a meeting tomorrow of finance ministers from all 27 member states. Tomorrow’s meeting is expected to descend into a clash between UK and France and Germany over draft legislation to regulate alternative investment funds. The UK, which is firmly opposed to aspects of the law on the grounds that they are protectionist, is likely to be outvoted by other member states that want a speedy adoption of the legislation. Timothy Geithner, the US treasury secretary, has also expressed opposition to the draft law.

Tomorrow’s meeting will be the first attended by George Osborne, who last week became the UK’s finance minister. Osborne is a leading member of the country’s Conservative-Liberal Democrat government.