18 August 2011

WSJ: France, Germany push for sanctions

France and Germany on Wednesday increased the pressure on their eurozone peers to improve fiscal discipline in the bloc with a proposal to cut off the region's wayward spenders from key European Union transfer funds.

The proposal marks an effort to boost fiscal discipline across the eurozone by giving countries incentives to rein in spending and cut their budget gaps. But the idea is controversial and could be difficult to enforce, as well as to sell to the rest of the bloc. The eurozone has repeatedly failed to impose financial penalties on profligate members.

In a letter to European Council President, Herman van Rompuy, French President Nicolas Sarkozy and German Chancellor Angela Merkel proposed withholding access to billions of euros in EU funds as a key stick to keep eurozone countries' spending in line. "In the future, payments from structural and cohesion funds would have to be suspended for eurozone countries that do not follow recommendations of excessive deficit procedure", Mr Sarkozy and Ms Merkel wrote. The letter also suggested that if countries under bailout programmes aren't able to spend the money they have been granted from EU structural and cohesion funds within a certain time, the remaining funds should be taken away and pooled into a new fund to be managed by the European Commission in order to bolster growth and improve competitiveness in the European Union.

The Franco-German letter underscores the fine line the eurozone's two largest economies are treading in trying to convince financial markets they are committed to fiscal discipline and at the same time to shoring up competitiveness in the region after economic growth stalled in the second quarter. But analysts say their proposals fall far short of more ambitious measures needed to address the eurozone crisis, such as increasing the size of the bloc's bailout fund or making the eurozone as a whole responsible for its Member Nations' debts—an idea that Ms Merkel and Mr Sarkozy played down on Tuesday.

The largest recipients of the EU funds mentioned in the letter are mainly EU accession countries led by Poland, which aren't yet in the currency bloc. But rich eurozone members are also large beneficiaries of EU funding to improve their infrastructures and prop up employment, with France set to receive €14.3 billion from 2007 to 2013, and Germany €26.3 billion.

Threatening to redirect EU transfer funds for countries in bailout programmes represents an effort by France and Germany to keep them under a tight leash at a time when eurozone taxpayers are financing rescue programmes, analysts said. However, the idea of giving more discretionary spending power to the European Commission could prove contentious among eurozone Member States.

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