The European Union on Friday launched a new initiative to contain the debt crisis in the euro zone and calm down financial markets by agreeing to tighten rules governing the single currency.
The finance ministers of the 27 EU nations pledged to enforce strict budget discipline and to impose sanctions on those who violate the budget deficit and debt limit enshrined in the Growth and Stability Pact.
They also agreed to react speedily and more efficiently in future and to scale down their existing debt mountains to restore market confidence.
The agreement at the first meeting of the new EU economic task force in Brussels comes at the end of a week which saw the euro plunging to a four-year low and massive sell-offs of global shares over new concerns that Europe’s debt crisis could stifle the global economic recovery.
Investors were also worried about Europe’s ability to contain the crisis and feared that other heavily indebted euro zone nations such as Portugal, Spain and Ireland would also be sucked into the debt spiral.
Earlier on Friday, the German Parliament approved the country’s contribution of 148 billion euros to a 750 billion euro (nearly USD 1 trillion) EU-IMF rescue package for the financially troubled nations in the euro zone after a heated debate in the Bundestag, the Lower House.
The decision by the finance ministers came too late for the markets to react and all key European share indices continued to slide, while the euro recovered slightly and closed at 1.257 against the dollar.
In London, the FTSE closed lower by 0.2 per cent, the CAC 40 in Paris by 0.05 per cent and the DAX in Frankfurt by 0.66 per cent, while IBEX in Madrid edged up by 1.48 per cent.
German Finance Minister Wolfgang Schaeuble and his French colleague Christine Lagarde told a joint news conference after the meeting of the EU taskforce that they agreed to tighten the Growth and Stability Pact with measures including political and financial sanctions and closer coordination.
“We want to give some muscles” to the pact and there are no plans to amend the Lisbon Treaty on European integration, Lagarde said.
The Growth and Stability Pact of the European Union has provisions for imposing fines on euro zone nations exceeding their budget deficit and debt limits, but fines were never imposed and analysts say this allowed Greece to accumulate its staggering debt of more than 300 billion euros, one of the main causes of the present euro zone crisis.
The EU economic taskforce is comprised of finance ministers of all 27 member nations, European Council President Herman Van Rompuy, EU Commissioner for Economic and Financial Affairs Olli Rehn, Chairman of the Euro Group Jean-Claude Juncker and President of the European Central Bank Jean-Claude Trichet.
Rompuy told journalists after the meeting that the task force is working on four goals to restore financial market confidence in the euro and to prevent the present debt crisis from happening again.
These are enforcing stricter budget discipline, promoting competitiveness among euro zone nations, establishing an effective crisis management mechanism and speedy and more coordinated intervention to deal with future crisis.
Rompuy said Friday’s meeting was only the beginning of a process, but the ministers not only reached an agreement on the four goals, but also on the direction in which they will move forward in each area.
The finance ministers will now start working on a comprehensive formal agreement, which will be presented to the European Council in October.
In a policy paper prior to the meeting, the German government had proposed that the national budget and economic policies of the euro zone member nations should be scrutinised by the European Commission and the European Central Bank and EU funding and voting rights of those nations which repeatedly violate the stability criteria should be suspended.
These proposals required changes in the Lisbon Treaty and received little support from Germany’s EU partners.
