Leading article: The wrong priority

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The European Commission is not only locking the stable door after the horse has bolted; it also appears to be installing a faulty lock. Yesterday the Commission unveiled plans to impose automatic fines on EU states that allow their public borrowing to breach certain limits.

The Commission's concern with sovereign debt levels across the EU is understandable. Bond markets are alarmed by the soaring public debt of all eurozone nations and in particular the so-called "PIIGS": Portugal, Ireland, Italy, Greece and Spain. Investors fear that there will be a default and, as a result, are pushing up the rates at which these countries can borrow. With these new rules, the Commission hopes to inject some confidence back into financial markets. And it cannot be denied that the previous EU arrangements, the Stability and Growth Pact, manifestly failed to impose fiscal discipline.

Yet the Commission appears to be missing the point about the crisis. Though Greece's borrowing was out of control, Ireland and Spain had modest levels of public debt levels before the downturn began. Spain even ran a budget surplus. The crisis in these economies was the result of the massive indebtedness of the private sector and the reckless property lending of their banks. It is to private debt, as much as public debt, that the Commission needs to direct its attention.

The other problem with these new rules is that the Commission is not addressing the immediate crisis facing nations on the eurozone periphery. When nations such as Spain, Greece and Ireland have suffered severe economic shocks in the past their currencies have depreciated, giving a boost to their exporters and helping them to grow their way out of trouble. But this time they are locked into the single currency: there can be no depreciation. And it is the removal of this safety valve which is making it so difficult for them to recover from this slump.

A balanced public budget alone is not the solution for these economies. Ireland has imposed severe public sector austerity over the past year in order to bring down its budget deficit but this has not resulted in the rebound in confidence that was hoped for. Indeed Ireland seems to be perilously close to the second leg of a double-dip recession. The EU Commission needs to broaden its thinking. By focusing on sovereign debt levels, it is missing the larger crisis in European economies.

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