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For bailout nations, new EU treaty is high price to pay

A new EU fiscal treaty could help keep national governments from overspending. But for EU nations already receiving bailouts, its conditions would be a big blow to their economies and national pride.

By Michail VafeiadisContributor / March 2, 2012

Germany's Chancellor Angela Merkel chats with European Commission President Jose Manuel Barroso and Italy's Prime Minister Mario Monti at an European Union leaders summit in Brussels March 2, 2012. Of the European Union's 27 members, 25 signed a 'fiscal compact' enshrining common debt rules that will put an especially heavy burden on nations already receiving bailout money.

Sebastien Pirlet/Reuters


If you were a voter in a financially troubled democracy, imagine putting up with this:

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  • Whenever a political impasse over a budget or some other fiscal crisis occurred – or even the whiff of one – outside monitors would swoop in to see how your government was handling it.
  • Annually, government officials would send foreign bureaucrats their budget plans for the coming year and give advance notice of imminent economic reforms and government bond sales.
  • The bureaucrats would have access to all government and banking data. They could order bank stress tests, require adjustments to government spending plans if revenues weren't keeping up, and as a last resort, suspend funds to the nation and even fine it if elected officials failed to rein in their budgets. 

Such impositions on national sovereignty aren't international diktats for some impoverished nation. They're the rules in the new fiscal treaty that European leaders agreed to Friday in a bid to limit government overspending in the European Union. It's not clear how strictly the rules will be enforced for nations that have so far avoided a fiscal crisis. But for those ailing nations already receiving bailouts, it represents a high price to pay – both in economic and political terms – for the privilege of remaining in the eurozone.

“The Commission will have wider discretion to issue recommendations about national tax and spending policies, something it usually avoids for countries that are not in breach of existing deficit rules," reports the Financial Times

For the treaty to take effect, it still has to be ratified by 25 of the 27 national governments in the European Union (Britain and the Czech Republic opted out of the pact). That's an uncertain task in some countries, as years of harsh austerity measures have left many voters disaffected with the EU. If passed by national governments, the rules would come into force immediately and apply "enhanced surveillance" of Greece, Portugal, and Ireland, current recipients of bailouts from the EU and the International Monetary Fund

The extent of the fiscal and economic scrutiny will depend on the severity of the state’s debt situation and the assistance it gets.  


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