The European Commission said governments should "decisively" toughen budget rules and speed up enforcement procedures for countries breaching the region's deficit limits after the Greek fiscal crisis forced leaders to adopt a bailout package worth €750 billion.
The 27 European Union states should reinforce budgetary surveillance, improve compliance with budget rules and give a bigger focus to public debt, the Brussels-based Commission said today.
Countries with "recurrent breaches of the" region's stability and growth pact "should be subjected to a more expeditious treatment", it said.
EU Economic and Monetary Affairs Commissioner Olli Rehn said governments should also submit their draft budgets to Brussels for scrutiny and peer review by other member states before they are adopted by national parliaments.
Mr Rehn said this would enable the Commission and the European Parliament to "identify economic challenges for the EU and the euro zone" at an earlier stage and recommend changes.
European policy makers on May 10th unveiled an unprecedented loan package after concern about a Greek debt crisis spreading to other nations pushed up borrowing costs and sparked a rout in global equity markets.
"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension, that they don't put at risk the stability of the other member states," Mr Rehn said in a statement. "For the euro area, it means deeper and broader surveillance."
At 11.7 per cent of GDP, Ireland will have the highest budget deficit in the EU this year, according to the Commission.
Greece may have a shortfall of 9.3 per cent of GDP with Spain's deficit seen at 9.8 per cent. The region's overall deficit may narrow to 6.1 per cent of GDP in 2011, while countries' debt burden will continue to swell for "some time," it said.
Spanish prime minister Jose Luis Rodriguez Zapatero told parliament in Madrid today that he plans to reduce public wages 5 per cent this year and freeze them in 2011. The measures will reduce the deficit by an additional 1.5 percentage points of GDP over two years, taking the shortfall to 6 per cent in 2011.
"There will be much bigger scrutiny and a tougher budget surveillance" after the Greek crisis, said Simon Barry, chief economist at Ulster Bank in Dublin. "We had a game changing series of events. Chances of a full fiscal union have definitely increased a lot."
However, France's government spokesman today expressed doubts over European Commission proposals.
"It's parliament that votes on the nation's budgets, it's not the European Commission that votes on the budget of the French nation," said government spokesman Luc Chatel after a cabinet meeting. "Parliament remains sovereign in the area of budgetary and fiscal decisions."
However, Mr Chatel said that France supported the idea of better fiscal and budgetary co-ordination, adding that it was necessary to set common targets. "There is obviously an exchange between the finance minister, the budget minister, with the Commission before the preparation of the annual budget and in the context of the budget over several years," he told reporters.
International Monetary Fund first deputy director John Lipsky said yesterday that while the rescue package is "an important step," debt-burdened nations must now step up consolidation efforts.
"The bedrock of dealing with these problems are the efforts of stabilisation and adjustment of each of the individual countries," he said, adding that virtually all advanced economies will need to push down budget deficits.
Bloomberg