Fines to lessen euro economic imbalances

Under European Commission proposals to lessen the economic imbalances, countries in Europe could face Fines for uncompetitive wages or house prices...

Countries that ignore recommendations to strengthen their competitiveness could be fined as much as 0.1 percent of gross domestic product, a senior commission official told reporters in Brussels today.

The penalties, which Ireland or Spain might have faced on the eve of the financial crisis, will be part of a "credible sanctions regime" to be proposed tomorrow, the official said on condition of anonymity.

With Ireland's deteriorating public finances looming as the euro's next test, the proposals are designed to plug holes in an economic management system that in May forced European governments to offer 860 billion euros ($1.2 trillion) in loans and pledges to blunt speculation that the currency Union might break up.

Penalties for imbalances such as outsized current-account deficits would be imposed "asymmetrically" on weaker economies, such as Portugal or Greece, the official said. Germany, with its trade surpluses, wouldn't be penalized for being too competitive.

The official didn't spell out how imbalances would be judged. While house prices will be one component of a planned competitiveness scoreboard, Europe-wide property-price statistics are not yet reliable enough to be used for "legally binding purposes," the official said.

The proposal will require approval by European governments and the European Parliament. The commission hopes it will take effect by mid-2011, the official said.

Source: Bloomberg