EU finance ministers near deal on tougher budget rules

EU finance ministers held talks in Luxembourg to complete an overhaul of EU budget rules, the Stability and Growth Pact, and agree on a report for EU leaders on how to make the rules tougher, to prevent a new sovereign debt crisis.

"There is an agreement on ... a significantly strengthened preventive action and a significantly strengthened system of imposing sanctions," Polish Finance Minister Jacek Rostowski told reporters on leaving the meeting.

"We are going in the right direction. There is also a high degree of agreement on the permanent system of crisis resolution. We can be satisfied with progress made."

The changes to the Stability and Growth Pact are the biggest overhaul of the fiscal rules underpinning the euro since its creation in 1999.

One of the thorny issues was how much ministerial discretion would apply in deciding sanctions, which would take the form of interest-bearing and non-interest bearing deposits and fines.

Sources close to the talks said that despite the opposition of a group of countries led by France, the ministers backed a proposal of the EU executive arm, the European Commission, that only a qualified majority of ministers could stop such sanctions -- or what the Commission calls reverse majority voting.

The name comes from the fact that until now, only a qualified majority could impose sanctions.

"There is agreement on the reverse majority voting," one EU source with insight into the talks said.

Sanctions would be imposed if a country ignores a warning issued by the Commission and does not change the policies that put it in breach of EU budget rules -- such as failing to reduce its budget deficit or debt quickly enough.

The resolve to toughen fiscal rules may be fading in some countries because any immediate danger of a full-blown sovereign debt crisis is widely thought to have passed, despite the problems suffered by Greece this year.

"A lot of member states are getting cold feet now, but during the crisis this spring, we saw what the sovereign debt crisis can do," said Dutch Finance Minister Jan Kees de Jager.

The executive European Commission presented last month a set of proposals to impose sanctions on euro zone countries breaking the EU fiscal rulebook much earlier and with less ministerial discretion.

EU rules say that countries must not run budget deficits higher than 3 percent of GDP or have debt above 60 percent of GDP. However, the global economic crisis has made most members of the 27-nation bloc go well above either, or both limits.

The ministers are also discussing how much to commit themselves to creating a permanent mechanism for crisis resolution in the euro zone in the future.

The 16-country area has so far only agreed on ad-hoc solutions for emergency financing -- an 80 billion euro bilateral loan package for Greece and a 500 billion euro European Financial Stability Mechanism for all euro zone states.