Imposing tougher sanctions on countries with debt problems, such as Greece, would exacerbate the economic crisis and disadvantage Eastern European countries, diplomats said ahead of a summit today (17 June) on strengthening EU budget discipline rules.
EU leaders will today raise doubts about the validity of economic sanctions to get countries to whittle down their deficits to below 3% of GDP, the EU's agreed threshold.
Talks ahead of the summit reveal a lack of enthusiasm for "hitting countries when they are already down," diplomatic sources said.
Countries with excessive deficit and debt levels are likely to face financial penalties under the revised Stability and Growth Pact. Up to now, the EU was focusing on deficits and neglecting the debt situation. This mistake will be corrected by the summit, diplomats said.
Herman Van Rompuy, the President of the European Council, will address the summit orally and outline his view about sanctions, but his concrete proposals in written form would come only in October.
The bottom line is that the EU will "stop some funds" to bad performers.
But a Franco-German proposal to suspend countries' voting rights as a last resort is not being taken seriously by others around the table, diplomats said.
Countries with high debts, like Belgium and Italy in particular, will be seeking softer commitments.
In addition, Eastern European countries, like Poland, which is one of the greatest beneficiaries of EU regional funds, are worried that new sanctions would disproportionately affect their economy.
"Why stopping cohesion and not agriculture? There should be equal treatment," an Eastern diplomat said.
"Imposing stronger penalties is fraught with difficulties as countries are already in trouble and taking money would only exacerbate these problems," another added.
UK seeks isolation
In an attempt to prevent a two-speed Europe, Germany will seek to extend any new rules on economic governance beyond the eurozone 16 to each of the 27 EU member states
This is likely to rile the UK, which has been consistently reluctant to sign up to further sanctions being discussed in the Council.
UK sources point out that there are already procedures in the EU's Stability and Growth Pact for the suspension of EU funding. The pact's terms limit debt and public deficit to 60% and 3% of GDP respectively.
"The bigger problem here is why there is a lack of political will to enforce the existing regime," another diplomat said.
Row brewing on treaty change
Diplomats also accuse Germany of using the possible suspension of voting rights as a ruse to remedy Angela Merkel's waning popularity at home.
Germany, later backed by France, has said it would not shy away from treaty change if new tougher sanctions needed it, while other member states have shown little appetite to reopen what many call a Pandora's Box of problems.
"Removing voting rights would absolutely require treaty change but everybody knows we are not going down that road again," an EU diplomat said, criticising the German proposal.
Irish officials have also said they would prefer to keep the existing treaty given the difficulties they faced getting the country to pass the agreement in two separate referenda (EURACTIV 03/10/09).
"Ireland is working actively in the task force chaired by European Council president to look at measures to strengthen economic governance. At the moment, the focus of that work is what we can do quickly and within the framework of the existing treaties – and we welcome that focus," the official told EURACTIV.
But others have defended the idea in the long run. "For the past 10 years we have been a dormant continent. Even when there is a need to make changes to the treaty we are not even allowed to talk about it," argued one diplomat, who said the treaty is already undergoing changes to accommodate the arrival of new MEPs.
On his recent visit to Berlin, newly elected British Prime Minister David Cameron said he would not exclude holding a referendum on any changes to the treaty that involved a transfer of power from London to Brussels.
Observers argue that this statement was empty rhetoric aimed at a Eurosceptic electorate, as Britain is not a member of the euro zone and would, in theory, not be involved in measures to tighten up governance within it.