FRANKFURT (MNI) – The European Parliament may yet push through
reforms that will make the Eurogroup more accountable in its
implementation of the Stability and Growth Pact; European Central Bank
Executive Board member Lorenzo Bini Smaghi said Monday.

Speaking the Official Monetary and Financial Institutions Forum in
Abu Dhabi, Bini Smaghi, according to a text provided by the ECB, said
current reform proposals by the European Council offer no guarantee that
Eurozone member states will not repeat the mistakes of the past.

“The Parliament might come up with ways to make the Eurogroup more
accountable in its implementation of the Stability and Growth Pact, with
a view to safeguard the general interests for sound budgetary policies
against the incentives for mutual forgiveness,” he said.

“The discussion is not yet over,” he asserted.

Bini Smaghi’s comments echo those by Council member Yves Mersch,
who said Sunday that “it is to be hoped that the European Parliament
will revert to an automatic sanction mechanism,” he asserted.

Bini Smaghi said the main cause for failing to adhere to the rules
of the Stability and Growth Pact — resulting in the current sovereign
debt crisis — was that finance ministers had “not been able to put
sufficient pressure on countries to ensure fiscal discipline.”

The key lesson to be learned from this is the need “to recognize
the limited powers of the Eurogroup and move to a rules-based system,
with automatic procedures and sanctions,” he said.

“The Heads of State and Government of the European Union followed a
second avenue, as they wanted to retain the ability to decide on
budgetary matters, in particular concerning the imposition of sanctions
on countries not respecting the rules,” Bini Smaghi observed.

Under the current proposal, “no change has been made to the system
of governance aimed at reducing the perverse incentives,” he said. “Why
should the Eurogroup be expected to behave in the future any differently
than in the past?”

The ECB has repeatedly urged stiffer penalties for countries
running up large deficits, including stopping access to European funding
and aid.

Under current proposals, rule breakers will only face sanctions
after six months, once they have been warned. Even then, the version
agreed on by leaders at the EU Summit in Brussels last week would give
much of the discretion back to politicians compared with a previous
proposal by the European Commission, thus effectively removing
automaticity.

Bini Smaghi also said that to emerge from the current crisis, “both
macroeconomic and structural policies” are required.

“As far as monetary policy is concerned, the non-standard measures
implemented during the crisis have contributed to the smooth functioning
of financial markets. The flow of credit to the private sector is
progressively rebounding. The exceptional measures are being removed as
economic and financial market conditions improve,” he said.

At the same time, “fiscal policy needs to be adjusted and brought
on a sustainable path, with a view to preserve — or restore — the
confidence of financial markets,” he said.

— Frankfurt bureau: +49-69-720 142. Email: jtreeck@marketnews.com —

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