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.

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

• 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.  

German Chancellor Angela Merkel called the agreement "a great leap" toward financial and political stability for the EU. The Wall Street Journal quoted French President Nicolas Sarkozy saying: " We're turning the page on the financial crisis.... The strategy we've implemented is bearing fruit."

The fiscal compact envisages the introduction of constant consultations between affected countries and the European Commission, the EU's executive body, even before necessary austerity measures are adopted. Eurozone countries would be responsible to provide all required information to the EU.

Under the new rules, EU regulators would “gain additional powers to seek banking data and order financial-system stress tests,” Bloomberg reports. Stress tests aim to assess the resilience of the banking sector in potential financial or economic crises. 

The commission would also be able to penalize bailed-out states that failed to rein in their budgets, by suspending payments and earmarked European funds. In the latest sign of Europe’s institutional transformation, the commission has threatened the unprecedented step of blocking Hungary’s €495 million ($657 million) in allocated funds for failing to control its excessive budget deficit.

The decision is an “incentive to correct a deviation, not a punishment,” said Olli Rehn, the European commissioner for economic and monetary affairs, the newspaper EuropeanVoice reports.

Member states that have received bailouts “would remain under this hyper-surveillance regime until they have paid back at least three-quarters of the money lent to them,” according to EUobserver.  

Although there are critics who think these measures will deprive countries from making independent decisions, unexpected support came from Europe’s southern flank, Greece. “I am in favor of having countries lose their sovereignty,” said Theodoros Pagalos, the Greek deputy prime minister, according to Greek newspaper Protothema last week. “I’ve always said I was European, and even in favor of federalism.”