EU thinks the unthinkable after Greek debacle (News Feature)

By Ben Nimmo Apr 14, 2010, 16:21 GMT

Brussels - The eurozone was meant to be so well disciplined that no member would ever get into financial difficulties.

This week, trust in that image finally died.

European Union rules forbid euro states from helping one another with their debts. But on Sunday, they stepped in to offer Greece a fiscal safety net, and on Wednesday the EU's executive said that system should be made permanent.

'There are no rules for this kind of (rescue) situation, because the existing rules were meant to stop anything like this happening,' one top EU official said.

When EU states created the euro in 1999, they agreed to strict rules - the Stability Pact - to keep the currency stable.

The rules called for member states to keep their budget deficits below 3 per cent of gross domestic product (GDP) and their gross government debt below 60 per cent of GDP, among other criteria.

The pact also banned any state-to-state rescues, on the assumption that the rules were tough enough to keep members out of trouble.

But no sooner were those rules set than euro states began to flaunt them.

The pact 'is a solid set of rules, but has the problem of compliance,' the EU's commissioner for economic and monetary affairs, Olli Rehn, admitted Wednesday.

'We need to sharpen our teeth,' Rehn said after a debate with colleagues on how to strengthen the euro.

Germany, for example, broke the 3-per-cent rule in 2002, 2003, 2004 and 2005. France did so in 2002, 2003 and 2004, while Italy only lived up to it once between 2001 and 2006.

In 2005, Germany and France led a push to weaken the enforcement of the pact, re-naming it the Growth and Stability Pact.

By 2007, meanwhile, seven eurozone states - half of its membership at the time - had broken the 60-per-cent gross debt limit.

And Greece systematically ignored both criteria, only once hitting either target between 2000 and 2010.

Yet EU states and the European Commission, the EU's executive, have consistently failed to impose tough sanctions on countries who broke the rules.

'To join the euro, you fulfil a lot of reforms, a lot of controls and check-ups. Then you go in and there are no mechanisms how you are controlled and how responsible you are,' Lithuanian President Dalia Grybauskaite said at the EU's latest summit.

With such weak enforcement, officials in Brussels say it is no wonder that the euro states failed to stop Greece's meltdown.

'They knew about the Greek problems for years, but they didn't do anything about it,' said one euro expert from a non-euro state, who asked not to be named because of the sensitivity of the issue.

The Greek crisis has, at least, galvanized the EU into action.

Rehn said that the commission would in May propose a whole string of sanctions to force euro states to stick to the rules.

The commission 'will present proposals to address the case of recidivists, countries who repeatedly break the rules,' he said.

But at the same time, he said the bloc should set up a permanent system to provide bailouts for euro states with Greek-style problems.

While strengthening the rules should ensure that such a meltdown never happens again, 'it is better to be safe than sorry,' he said.

Rehn's first move as economic commissioner, in February, was to call for the EU's statistical arm to be given new powers to audit national accounts, after Greece was caught cooking its books.

And taken together, his proposals highlight the deepest impact of the Greek crisis: that the euro states have lost faith in one another's ability to live up to the existing rules.

'Today we don't need to reform the pact, it would be a good start just to apply it. But maybe we need new rules to build confidence again,' the top official said.