EU threatens regional aid cuts for budget offenders

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The European Commission is considering cutting its 50 billion euro annual package of regional aid for countries which repeatedly infringe the EU's budget rulebook in a bid to discourage other member states from following in the footsteps of debt-stricken Greece.

"We have to sharpen our teeth against countries which repeatedly break rules," EU Economy Commissioner Olli Rehn said yesterday (14 April), announcing that a comprehensive proposal on the matter would be presented on 12 May.

Among the measures under consideration, the commissioner indicated the possibility to "suspend cohesion funds" for states which are regularly in breach of the EU's stability and growth pact.

These measures would not, however, affect the other funding mechanisms in the commission's stable of regional funds.

Cohesion funds are used to support the EU's poorest regions, notably those which have a GDP lower than 70% of the EU average (see 'Background').

This idea is likely to be debated at an informal meeting of EU economic ministers to be held in Madrid on Friday (16 April).

Stability and Growth Pact

Influential member states such as France, and to a lesser extent Germany, have in the past campaigned for a looser interpretation of stability pact rules, which require the European Commission to launch an excessive deficit procedure as soon a country's deficit breaks the 3% GDP limit.

The stimulus plans adopted in 2008 to combat the recession forced almost all member states to break the ceiling and the rules were temporarily relaxed (EURACTIV 26/11/08).

But the Greek debt crisis is forcing Paris and Berlin to reconsider their stance and ask for a stricter interpretation of EU budget rules, with German Chancellor Angela Merkel even calling for repeated offenders to be excluded from the euro currency (EURACTIV 18/03/10).

The excessive deficit procedure works mainly as a political instrument to promote budget discipline, but has never ended up imposing actual fines.

Officials did not rule out the Commission starting procedures in future against states with a debt ratio above 60% of GDP, a situation which mainly concerns the bloc's Mediterranean countries.

Rehn also plans to "deepen and broaden" budgetary surveillance, warning that "macro-economic imbalances can have serious consequences over time".

The idea follows a request by EU leaders in March to apply the provisions of the Lisbon Treaty, which foresee strengthened coordination and surveillance of budgetary discipline across eurozone member states (EURACTIV 24/03/10).

Permanent rescue mechanism

"The college holds the view that it is necessary to set up a permanent crisis resolution mechanism with strong disincentives for its activation," Commissioner Rehn said at a press conference.

After long negotiations, EU member states agreed to establish an ad hoc financial instrument to help Greece tackle its debt problem (EURACTIV 12/04/10).

The European Commission is now thinking of devising a permanent mechanism to rescue member states, but only as a last resort. Asked to clarify this concept, Rehn said the Commission was still considering "what kind of disincentives we need to develop in order to prevent this new mechanism from being used".

Rehn dismisses German ideas

The commissioner dismissed suggestions from Chancellor Merkel that eurozone members should be expelled from the bloc for repeatedly violating common rules.

"According to the treaty, this is not possible," he said. "This idea would require a treaty change. Personally I have some reservations."

Rehn said the idea of establishing a European Monetary Fund, circulated in Germany in recent weeks, was "an interesting contribution" but underlined that this too would require a treaty change.

"We all know what that means," Rehn said, reiterating his preference for strengthening existing instruments.

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Regional aid is mainly channelled through the cohesion funds, which consume the second largest slice of the EU budget after agriculture.

The EU financial programme for the period 2007-2013 devotes more than 35% of the entire budget to cohesion projects, worth a total of almost 350 billion euros. Expenditure on regional projects in 2010 will total some 49 billion euros, according to estimates.

Poland is the largest beneficiary with over 67 billion euros, followed by Spain, Italy and Hungary.

  • 16 April 2010: Informal meeting of the Eurogroup, Madrid.
  • 16-18 April 2010: Informal meeting of economic and finance ministers (Ecofin), Madrid.

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