The European Parliament voted on Wednesday to toughen EU budget rules in a bid to help restore market confidence in the region's public finances and prevent future sovereign debt crises.
The new rules will make it easier to quickly impose financial penalties on countries breaking the EU debt and deficit limits of 60% and 3% of GDP respectively and to scrutinise more thoroughly the economies of the 27-nation bloc.
They will become law once they are approved by European Union finance ministers on October 4 and published in the official EU journal, probably before the end of the year.
They will apply mainly to the 17 countries sharing the euro, whose debt the markets have in their sights after Greece, Ireland and Portugal had to seek emergency funding from international lenders because of bloated accounts.
"The adopted package represents a fundamental change to the way the Economic and Monetary Union is governed," the European Commission said in a statement.
"It will ensure fiscal discipline and facilitate economic stability, which is crucial for sustainable growth and job creation."
There will also be penalties for governments with deficits of less than 3 percent but not moving towards the medium-term objective of a budget close to balance or in surplus.
"(It) is about much more than sanctions, it is about prevention. It recognises that prevention is better than cure," European Parliament President Jerzy Buzek said.
"We can not turn the clock back, but the package will ensure that member states' budgets will be credible," he said.
The EU began a review of its fiscal rulebook in the first half of 2010 and last September the Commission presented six proposals — dubbed the 'six-pack' — to examine EU national economies more thoroughly and penalise rule-breakers.
Haggling over how easily sanctions should be imposed on euro zone countries breaking the rules has led to the debate dragging on until now, despite the raging euro zone debt crisis.
France and Germany wanted more political discretion in imposing sanctions on rule-breakers, trying to weaken the Commission's initial idea of making sanctions almost automatic.
But with the European Parliament and the European Central Bank pushing to eliminate the political horse-trading, and with pressure from markets keen to see the euro zone can make fiscal policies sustainable, a deal was reached.
PREVENTION BETTER THAN CURE
The deal gives teeth to the existing — but not observed — EU rule that countries should not only not run budget deficits, but that they should seek budget balance or a surplus.
Those who ignore the balanced budget goal will face financial sanctions if the European Commission, the EU's executive arm, issues a warning that the country is straying from the right fiscal path.
While there are several procedural steps, in the end such a warning can only be rejected, and therefore the sanction process stopped, if euro zone finance ministers vote it down.
This would mean that nine out of the 17 euro zone countries would have to be against issuing such a warning and the decision of the ministers would have to be explained in writing.
Parliament will also be able to ask the finance minister of the country receiving the warning to explain its policies before the EU Parliament's economic affairs committee.
Similarly, financial sanctions would be imposed on those who did not try to reduce their public debt to the EU-accepted limit of 60% of GDP fast enough.
More financial penalties would swiftly await those who run budget deficits higher than 3% of GDP and those who fail to address major imbalances in their economies despite warnings from the Commission and other euro zone members.
The Commission would monitor the economies of euro zone countries to detect any macroeconomic imbalances that could become a problem for the wider euro zone.
In assessing if a country has macroeconomic imbalances, the Commission would look at countries that have large current account deficits, but also large current account surpluses — although the latter would likely be treated with more leniency.
