FINANCE | 21.07.2010

Germany and France join forces to punish EU budget deficit offenders

The EU is struggling to rebuild trust in its single currency

Paris and Berlin have called on European Council President Herman van Rompuy to enforce more fiscal discipline and tougher sanctions for EU countries that fail to comply with the bloc's regulations.

France and Germany have issued a joint letter presenting proposals for improving Europe's economic governance. The two countries have called for tougher sanctions to be imposed on EU countries that fail to abide by the bloc's budget deficit rules.

In a first for Franco-German relations, German Finance Minister Wolfgang Schauble had joined French ministers for their weekly cabinet meeting.

The two countries' joint letter is part of European efforts to deal with the damage caused by the Greek debt crisis and tackle concerns over other countries such as Portugal or Spain ending up in a similar financial plight.

On Friday the results of a so-called bank stress test are to be published outlining which banks have made it safely out of the crisis and which are still in out of shape.

Fiscal discipline and tougher sanctions

Schaeuble is confident the proposed new measures will do the job

"We're sure that these bank tests and measures such as deficit cutting and tougher rules for the Stability and Growth Pact will allow us to restore confidence ... in the stability of Europe and the stability of the euro," Schaeuble told reporters after meeting with his French counterpart Christine Lagarde.

The joint letter is addressed to the President of the European Council, Herman van Rompuy and calls tough sanctions to be imposed on serial budget deficit offenders.

Suggested fines include a temporary suspension of eurozone voting rights.

"In the short term, a non-binding political alternative could take the form of a political accord that could allow euro area member states either to bar an offending member state ... from taking part in specific votes … or to make a political commitment to neutralise the effect of that member's vote," the letter says.

Schaeuble said he was convinced that improved fiscal discipline in combination with the banks' stress tests could bring back confidence in the single euro currency.

French President Nicolas Sarkozy used the meeting to call for the two countries to move towards converging their fiscal systems, and proposed a side-by-side comparison of their taxation practices.

Author: Andreas Illmer
Editor: Susan Houlton

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