Europe starts era of economic coordination

Drawing from the costly lessons of the eurozone debt crisis, now endangering Portugal and Spain, the European Union agreed on a series of steps in the past several months to reassure nervous markets.

Among them is the first ever "European semester," a programme that kicks-off today in a bid to coordinate economic and budgetary policy, in the wake of fiscal disasters that led to bailouts of Greece and Ireland last year.

The initiative brings the EU closer to the elusive goal of economic governance between 27 vastly different countries, ranging from export-driven Germany to farm-heavy France and formerly communist Poland.

“Last year’s developments have confirmed that piecemeal solutions are not enough: we need a comprehensive response,” said European Commission president Jose Manuel Barroso, who described the new system as a “revolution.”

“Europe can only be strong if it is able to act in a coordinated manner, with strong institutions, with a common governance, with stronger economic coordination,” he said last week.

After years of loose book-keeping, Greece shook the euro to its core last year when it revealed a larger public deficit than previously reported, sparking a crisis that led to a 110-billion-euro EU-IMF bailout.

Ireland followed suit last month with a 67-billion-euro financial lifeline after the government pumped billions into struggling banks, pushing the deficit to 32 percent of national output, 10 times over the limit set in EU rules.

In a signal to markets that it would shield the euro for the long run, the EU has agreed to change its core treaty in order to create a permanent financial safety net to help any country in trouble under tough conditions, replacing a temporary 750-billion-euro fund expiring in 2013.

But to avoid being forced into shelling out more cash for spendthrift member states, the EU decided to raise the threat of sanctions against countries that run excessive deficits and debts.

Under the Union's Stability and Growth Pact, countries must keep their public deficits under 3.0 percent of gross domestic product but most countries currently exceed the limit.

The EU will now get to review national budgets before they are adopted by legislatures.

The European semester's six-month cycle begins today when the European Commission unveils an "Annual Growth Survey" on the impact of the crisis on the economy, employment, public debt and growth prospects.

The report will be used in March by the European Council, the body representing the 27 EU states, to provide policy advice to individual countries.

National governments will then have to present their medium-term budgetary strategies in April. In June and July, the council and commission will issue recommendations before states finalise their budgets for the following year.

The reform was formally adopted in September after overcoming concerns from reluctant countries, including Britain, worried about keeping their fiscal sovereignty intact.

"To me, this exercise will lead to a colossal transfer of responsibilities," Italian Finance Minister Giulio Tremonti told French financial daily Les Echos this morning.

"With a common currency, we no longer can lead 27 different budgetary policies," he said.