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EU Observer - February 17, 2009 Andrew Willis EU economy commissioner Joaquin Almunia will this week name the first group of states to receive disciplinary action by Brussels for breaching the rules underpinning the euro. Ahead of Wednesday's (18 January) move, the commissioner insisted that member states adhere to the Stability and Growth Pact, which requires that countries keep their budget deficits below three percent of GDP. "The rules were established for everybody and must be respected," he said before a debate in the European Parliament on Monday. "What they say as far as budget discipline is concerned is clear: In the case where countries have recorded or plan deficits above the three percent barrier, we must launch procedures established in the [EU] treaty," he added. Of the countries up for review on Wednesday, France, Spain and Greece are expected to attract excessive deficit action from the commission, according to draft documents seen by Reuters. The Irish deficit for 2009 is also predicted to exceed the three percent ceiling, according to the commission's interim forecast published last month. But the biggest question is whether the commission's actions will have any bite as member states grapple with the effects of the economic crisis at home. Karel Lannoo, head of the Centre for European Studies, a Brussels-based think-tank, thinks the pact is already on its last legs. "Today, it is almost entirely dead," he said of the pact, noting that it went into decline after 2005 when it was reformed to accommodate France's deficit. Speaking about Europe's reaction to the global economic downturn, Mr Lannoo said that the bloc made mistakes from the very start. "The fault was already made in October when there was no willingness to consider this as a European problem but rather as national problems," he said, adding that the European Economic Recovery Plan signed by EU leaders in December seemed more of an afterthought than a genuine attempt at co-ordination. Since then, the EU has witnessed a barrage of unilateral actions to save national banks and prop-up structurally flawed industries, with scant regard paid to potential negative consequences for other member states. French President Nicolas Sarkozy has attracted the most attention by calling on French car companies to relocate back to France, but he is by no means alone is seeking national solutions for his constituents. "The same has been happening in the financial sector for four months and who is shouting about it? Almost nobody. But it's enormously distorting," says Mr Lannoo. "I'm surprised by the degree to which there is almost no willingness to challenge this." With new initiatives being announced on an almost daily basis, the commission is struggling to deal with the rising number of protectionist attacks to the internal market. Writing in the Financial Times last week, former Italian Prime Minister Giuliano Amato and former EU commissioner Emma Bonino outlined a credible alternative to the current approach. Both the financial and car sectors should be declared in a state of crisis, they argue. Then, two task forces of national officials should be set up and chaired by the commission. "Their mandate would be to co-ordinate state aid, making sure that national measures re-inforce each other to the greater benefit of the sectors concerned and avoid bending competition rules," they said. It is doubtful whether member state governments would agree to such a project, however. Eurozone problems The single market is not the only EU pillar currently under threat. While the euro celebrated its 10th anniversary last month and welcomed Slovakia as its newest member, the eurozone itself has been put under great pressure by the unfolding crisis. One of the biggest issues is spread in rates offered on government bonds. Markets have grown increasingly uneasy over ballooning government deficits in recent weeks, prompting investors to demand higher yields when buying sovereign debt from EU states whose finances are perceived as vulnerable. The subsequent rise in borrowing costs increases the threat of a national default, prompting the question of whether such an event could cause a current member to leave the eurozone. "The probability of this split is zero. The list of members to join the euro is very long," Mr Almunia told MEPs on Monday in an apparent attempt to quash such speculation. Mr Lannoo has a more nuanced approach. "Every country will ask itself: 'Is it better that I stay inside [the eurozone] or is it better that I go outside?'" he said, referring to the cheaper financing of public debt enjoyed by euro members versus the option of currency devaluation enjoyed by non-members. Euro-bond idea In the meantime, calls for a "euro-bond," first suggested by Italian finance minister Giulio Tremonti, are likely to go unanswered, with Germany baulking at the idea of picking up the bill. Yields on a common "euro-bond" used by all eurozone states would be significantly lower than those currently paid by a number of peripheral countries, as the risk of a eurozone default is highly unlikely. However "euro-bond" yields would probably exceed those currently paid by Germany. Instead, member states could start by co-ordinating their bond issuance calendars to reduce competition between countries attempting to raise capital. To some, greater co-ordination at the EU level would seem to be a solution for much of the EU's current woes but it is hard to see where this would come from.

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