European Union finance ministers agreed on Tuesday on tougher rules against excessive borrowing and macroeconomic imbalances, aimed to shore up market confidence and help end the sovereign debt crisis.

The ministers backed European Commission proposals to sharpen the 27-nation's budget rules, the Stability and Growth Pact, by introducing financial sanctions for rule-breakers more swiftly and automatically.

The Council agreed a general approach on a package of measures aimed at strengthening economic governance in the EU - and more specifically in the euro area - as part of the EU's response to the challenges highlighted by recent turmoil on sovereign debt markets, conclusions of the meeting said.

One of the main points sharpening the rules is to make sanctions for offenders more automatic and less dependent on political horse-trading among EU finance ministers.

The discretionary approach to sanctions in 2003 allowed France and Germany to block a stepping-up of EU disciplinary procedures against them for running excessive budget deficits for years and led to the loosening of the pact in 2005.

After the Commission proposed last September to make sanctions almost automatic for those who break the rules, France and Germany managed to water down this proposal by introducing two stages into the process which would make it easier to stop the penalties from being applied.

But euro zone leaders agreed on Saturday that a call by the Commission to penalize a country should, as a rule, be followed by finance ministers. If not, the ministers must explain themselves in writing. The ministerial agreement on Tuesday therefore returned to the original Commission proposal.

The Commission's proposal for imposing a deposit or a fine would be considered adopted unless turned down by the Council via qualified majority, the ministers conclusions said.

The elimination of the Franco-German change is likely to make it easier for finance ministers to reach an agreement on the reform with the European Parliament, which co-decides on the changes and has criticized the Franco-German ideas.


Now euro zone countries are to face sanctions if they ignore the existing, but toothless, rule that governments should strive toward a budget close to balance or in surplus -- what is called the medium-term objective (MTO).

To do that, countries that do not have budgets in balance cannot spend more every year than the medium-term rate of economic growth. This is meant to ensure that revenue windfalls are not spent but instead allocated to debt reduction, the ministers said.

If a country does not adhere to that rule, it would first be warned by the Commission, which is the guardian of EU rules.

If that does not help, it would have to make an interest-bearing deposit of 0.2 percent of GDP.

The Commission proposed that already when it opens the so-called excessive deficit procedure against a country with a budget deficit above 3 percent of GDP, the EU ceiling, it would now entail making a non-interest bearing deposit of 0.2 percent of GDP in a Commission account.

That compares to the current setup which starts the procedure with only a mild political embarrassment for offenders.

The deposit would be converted into a fine if the budget sinner does not mend its ways as recommended by EU finance ministers. So far, sanctions were only an option at the end of the procedure, which could take years.

To put more focus on reducing debt, the ministers agreed that those with public debt-to-GDP ratios above the EU limit of 60 percent of GDP would have to reduce it by one twentieth of the excess each year, measured over a period of three years.

If not, the country would be put in the excessive deficit procedure, which entails making a non-interest bearing deposit of 0.2 percent of GDP at the start.

But to win the support of countries like Italy and Poland, the ministers introduced certain caveats to this criterion.

A decision to subject a country to the excessive deficit procedure would not only be based on the numerical benchmark, but would also take into account other relevant factors, such as implicit liabilities related to private sector debt and aging cost, they said.

The net cost of implementation of a pension reform would also be considered, they said.

Finally, to minimize the risk of crises triggered by macroeconomic imbalances such as housing bubbles in Ireland or Spain, the Commission proposed that it would monitor the economies of EU members to detect such emerging imbalances.

In the case of severe imbalances, countries would be put into an Excessive Imbalances Procedure entailing recommendations from EU finance ministers on how to reduce the imbalance.

Repeated non-compliance with the recommendations could in the case of euro area member states eventually lead to sanctions, the ministers agreed.

Specifically, a decision to impose a yearly fine equal to 0.1 percent of the member state's GDP would be adopted, they said.

(Reporting by Jan Strupczewski, editing by Patrick Graham)