The European Commission will check eurozone countries' draft budgets to verify whether they are in line with EU rules and will ask for changes if they are not, under a deal struck today (20 February) with the European Parliament, which adopted the so-called two-pack bundle of legislation.
After months of wrangling, EU lawmakers backed the new powers for the Commission to further strengthen eurozone budget discipline and prevent another sovereign debt crisis.
The new two-pack law complements the existing budget rules, tightened at the end of 2011 through the introduction of swifter financial sanctions for those breaking deficit and debt limits.
It gives the Commission an extra level of oversight on member countries' budgets. Governments are free to ignore the commission's recommendations but risk EU legal action by doing so.
"These new laws are a key element in building stronger economic governance for the euro area and boosting the EU's armour against further economic crises," European Parliament President Martin Schulz said.
The deal is expected to become law in March and will oblige eurozone governments to send draft budgets for the following year, based on independent economic forecasts, to the Commission before 15 October for verification.
"This will mean that the euro area can benefit from a more integrated and effective policy-setting framework already for the 2014 budgetary cycle," EU Economic and Monetary Affairs Commissioner Olli Rehn said after the deal was reached.
Eurozone countries already agree, in a process that takes up the first six months of the year, on where their fiscal policy should be heading the following year. The Commission makes suggestions that must be approved by governments.
The additional step of vetting draft national budgets in October before they are submitted to national parliaments for approval is meant to catch any variations from what governments had agreed to earlier.
The new law will allow the Commission to put a country that is "threatened with financial difficulties" under strict surveillance. That means the government would be obliged to deal with the problems that led to the difficulties and be subject to quarterly progress reviews.
The agreement ends a long deadlock between the European Parliament and the Commission over the new legislation.
While Parliament did not object to the new powers themselves, it wanted in return for its support that the Commission present a proposal for a European Redemption Fund.
It would mutualise eurozone debt over 60% of GDP and help pay it down over 20 years via cheaper eurozone funding.
The Redemption Fund idea, even though originally presented by a group of German economists, has been firmly rejected by the Germans and several other eurozone governments, which say any debt mutualisation could only come at the end of a long process that would ensure a banking, political and fiscal union first.
The Commission did not want to draft a proposal that had no support from eurozone governments.
In the end, a deal was possible because the Commission will set up a panel to study the feasibility of the redemption fund and report back by March 2014.
The conclusions of the working group will not be binding, but if there is a strong recommendation for such a fund, the EU executive might then decide to draft such a proposal before the end of its term in June 2014.