EC threatens indebted members with fines

Far-reaching proposals to crack down on European Union countries that fail to keep a tight rein on their economies could eventually apply to the UK, the European Commission said yesterday.

Controversially, the proposals, which will have to be approved by EU member states, would give Brussels the right to impose automatic fines on any country that flouts the EU's rules on debt and deficit.

The Commission's President, Jose Manuel Barosso, described the measures as the "most comprehensive reinforcement of economic governance since the launch of the Economic and Monetary Union".

Germany has been leading calls for tough penalties to enforce the Stability and Growth Pact. The agreement, which commits member states to keep national deficits below 3 per cent of GDP and debt within 60 per cent of GDP, has so far not been enforced.

Olli Rehn, the Economic Affairs Commissioner, insisted Brussels now enjoys the support of many EU governments, which have acknowledged that the recent sovereign debt crisis in the single-currency zone proved tougher measures were required. He also wants to address macro-economic imbalances to "prevent crises like those in Spain and Ireland, whose growth were based on imbalances – especially on the housing bubble".

Although initially aimed at the 16 eurozone countries, the Commission plans to draft another system of sanctions that it insists would apply to all 27 member states.

However, it is not clear how it plans to get around Britain's opt-out clause, Article 126, which stipulates that it is exempt from sanctions. "There is a body of opinion that wants to extend sanctions to all 27 member states. But Britain has a clear opt-out and it seems impossible to overcome that," one EU official said.

Mr Rehn appeared yesterday to dodge the questions of whether Britain would face penalties, saying: "We are currently preparing proposals for all 27 EU countries. These would cover all member states, according to their treaty obligations."

Germany and other countries are also leaning heavily on the EU President, Herman van Rompuy, to come up with a system of sanctions for all EU member states when he unveils a package on economic governance at the end of October, as part of his Taskforce on Economic Governance.

Officials say possible sanctions include stripping a country of its EU agricultural subsidies or its structural funds. In addition, Berlin is calling for rule-breakers to lose their voting rights at the European Council.

The overhaul of the governance of eurozone reflects anger that some members, notably countries such as Greece and Portugal, hugely exceeded the borrowing limits set down in the Stability and Growth Pact.

Nonetheless, the sanctions now proposed will face opposition from some member countries. France, in particular, is concerned about the prospect of Commission bureaucrats having power to levy fines.