Under the proposal, presented on Wednesday (12 May), EU countries will review each others' draft annual budgets before they are adopted at national level.
This system – if approved by EU leaders at a meeting in June – would apply as of 2011 and would introduce closer economic surveillance in the bloc, with an early peer-review system aimed at preventing a repeat of the Greek sovereign debt crisis.
"Let's be clear: You can't have a monetary union without having an economic union," stressed European Commission President José Manuel Barroso.
"Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union all together."
The surveillance would be carried out in the first half of the year during a "European semester," before EU governments prepare their national budgets and economic reform programmes.
"In case of obvious inadequacies in the budget plans for the following year, a revision of [national budget] plans could be recommended," the Commission says.
"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension [and] that they don't put at risk the stability of other member states," said Economic and Monetary Affairs Commissioner Olli Rehn.
The system would be applied to all countries, but surveillance would be tighter for those which have adopted the euro.
For eurozone countries, such a review mechanism should act as an early-warning system for states found to breach the Stability and Growth Pact, which sets a limit on public debt (60% of GDP) and budget deficits (3% of GDP).
EU officials claim the system will not violate a country's national sovereignty but will provide an opportunity to check the assumptions on which draft budgets are based, such as economic growth, inflation and interest rates.
Barroso said the system will provide an opportunity for national parliaments to better scrutinise their country's budget. "What we are doing is giving parliaments more information and therefore more power," he said.
Greece, which is at the root of the current crisis, was found to be grossly lying about its macro-economic statistics for years, pretending its budget deficits were lower than they really were and submitting false reports to EU statistical office Eurostat.
"A prerequisite would be to strengthen Eurostat's mandate to audit national statistics," the Commission says. "It is important to bring this proposal swiftly into force as this will improve the quality of reporting on public finances."
Addressing macro-economic imbalances
The Commission also plans to "deepen and broaden" budgetary surveillance to macro-economic policies, warning that "macro-economic imbalances can have serious consequences over time".
However, such a proposal is likely to be resisted in Germany, where Chancellor Angela Merkel has said it would make fiscal surveillance "unnecessarily political" (EurActiv 02/03/10).
Under the Commission's plans, assessments of longer-term national economic reform programmes would be synchronised with budget discipline reviews. A scoreboard would review macro-economic indicators such as productivity, unit labour costs, employment, public debt and private sector credit in order to detect asset price booms and excessive credit growth at an early stage.
For all EU member states, these macroeconomic imbalances would be addressed under the draft 'Europe 2020' strategy for growth and jobs. For countries which have adopted the euro, the peer review currently carried out by the Eurogroup would be upgraded into more structured surveillance by making use of Article 136 of the EU treaty.
Sanctions and incentives
To give teeth to the surveillance system, the European Commission is proposing to include the possibility of "imposing interest-bearing deposits" in case member states make insufficient progress in consolidating their public finances in good economic times.
As for incentives, countries which accumulate large surpluses during periods of economic prosperity would be allowed to spend more during downturns without being subjected to an excessive deficit procedure.
Payments under the EU's €70 billion cohesion fund, which helps member states reduce economic and social disparities for the period 2007-2013, can also be suspended. The sanction can already be applied to eurozone countries which recurrently breach the Stability and Growth Pact. "We are not planning to use it for the moment," said an EU official.