BRUSSELS - The European Union's budget rules will to be sharpened to try and prevent countries from following Greece's flagrant flouting of debt and deficit limits, the EU's top economy official said Wednesday.
Greece's massive budget gap and soaring debt have rocked Europe's currency union and exposed the flaws in a loose system of rules that the 16 nations that use the euro are asked to obey — but without any real threat of punishment.
EU Economy Commissioner Olli Rehn told reporters that "peer pressure has lacked teeth" and that he planned proposals "to address the case of recidivist countries who repeatedly break the rules." More details would come in a paper he will publish on May 12.
He said he didn't want to create new sanctions, suggesting that the EU could use existing options such as blocking funding for economic development, which often pays for major infrastructure projects such as roads in poorer EU nations.
"The latest developments in the European economy and in the euro area, not least in and around Greece, have clearly shown that there is a pressing and urgent need to reinforce economic policy coordination and surveillance," he said.
He rejected German Chancellor Angela Merkel's suggestion of expelling a country from the euro currency if it keeps breaking the rules, saying he believed it would require changes to the European treaties — a difficult process — and also went against the spirit of European unity.
However, Rehn said some "disincentives" are needed to prevent another eurozone country requiring a bailout. He didn't elaborate.
"The key is how do we reduce moral hazard, what is the policy conditionality and how do we make this safety net of last resort so unattractive that no country voluntarily wants to end up in such a situation," he said. Moral hazard refers to the risk that insuring people against the consequences of reckless behavior may make them more likely to engage in it.
Euro governments agreed on Sunday to provide some euro30 billion in individual loans to Greece if it can't borrow from financial markets.
Germany and the European Central Bank argued that interest rates had to be high enough to prevent Greece getting a free ride. The agreed rate of around 5 percent is higher than the eurozone average but much lower than recent Greek borrowing costs of around 7 percent.
Rehn refused to comment on how the bailout would work and whether loans from the International Monetary Fund might come faster than eurozone nations because some, such as Germany, may need to pass legislation to make the loan.
