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Originally published Wednesday, May 12, 2010 at 6:35 AM

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EU lays out tighter rules to stem debt crisis

European Union officials urged a crackdown on widespread government overspending, calling Wednesday for much closer economic coordination between EU nations to curb the acute debt crisis that has threatened to sink their shared currency.

AP Business Writer

BRUSSELS —

European Union officials urged a crackdown on widespread government overspending, calling Wednesday for much closer economic coordination between EU nations to curb the acute debt crisis that has threatened to sink their shared currency.

The plan by the EU's executive commission advocated unprecedented scrutiny of countries' spending plans even before they go to their national parliaments - and new financial penalties for rulebreakers.

That would deepen the ties that bind 16 nations in Europe's currency union and would curtail some nations' power over their own economies in an attempt to keep more reckless spenders like recently bailed-out Greece from dumping their debts on all eurozone members.

The EU is effectively extending its powers to monitor budgets by seeking oversight for the entire economy, saying this is crucial to prevent the debt mountains that have caused the euro to slide in value against the dollar and forced Greece to seek financial help from EU nations.

EU Economy Commissioner Olli Rehn said the EU's moves would ensure that national governments' spending plans were "consistent with European objectives." They will also "lead to a substantial deepening and prudent widening of the economic and monetary union," he said.

German Foreign Minister Guido Westerwelle, who heads the smaller party in Germany's coalition government, rejected the idea, saying the EU should not interfere with the "core of national sovereignty," the DAPD news agency reported.

German Chancellor Angela Merkel was less concerned, saying budget programs "were not secret" and it would not be a problem for parliaments to know the European Commission's views on national budgets at an earlier stage.

But Merkel said she didn't believe the EU plans went far enough and the EU would need more radical legal changes that could require lengthy parliament votes and public polls by member nations.

"We believe that treaty changes must be involved if you really want to have a strong stability and growth pact," she said, according to DAPD.

Heavy European government debt loads have raised fears of government defaults, financial panic and even the breakup of the eurozone - fears calmed for the moment by a euro750 billion ($1 trillion) bailout package announced Monday by eurozone countries and the International Monetary Fund.

The size of the EU fund initially lifted markets by reassuring them that countries would not default. But economists are saying the mere presence of that backstop for shaky government finances eases the pressure on national politicians to keep debt and deficits within strict limits, and that more loans will not help if Europe doesn't get a grip on running up debt in the first place.

The EU is now calling for governments to do more to cut their mounting debt, replacing the EU's existing focus on budget deficits - the yearly differences in public spending and income.

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European governments have been loaded with debt from the high costs of saving banks and paying out far more to support economies and welfare systems during the recent recession. The EU average increased to 80 percent of national income, above the 60 percent legal limit originally set up to safeguard the euro.

EU Commission President Jose Manuel Barroso suggested that countries that aren't doing enough to cut debt in good times should for the first time face real punishment - such as "interest-bearing deposits" - essentially forcing governments to pay a financial penalty that could eventually be returned to them.

This adds another weapon to the EU executive's paltry enforcement arsenal. It currently has the possibility of punishing badly behaving governments by holding back EU funding for major infrastructure projects.

"Without sanctions, it will not be enough in credibility," Barroso told reporters. "It is important for member states to respect the stability and growth pact."

In practice, the EU suggestions would see eurozone governments jointly monitor each others' economies and could mean that EU finance ministers would discuss budget programs with other EU nations before they put them to their own parliaments - a radical change.

Barroso said he believed national lawmakers would support their governments having a say over other eurozone budgets because the current crisis has show the "huge ramifications" and costs to each country going it alone with reckless spending.

"What we are suggesting is for there to be an assessment of draft budgets and see if this fits in well with what goes on elsewhere in Europe because national measures have an effect on others," he said.

"You can't have a monetary union without an economic union and this is the absolute prerequisite for having monetary union," he said.

If countries "don't want that then it's better to forget monetary union altogether," he said.

The EU also wants member states to coordinate economic policies ahead of time among themselves so they don't "put at risk the stability of the other member states" by running up major trade deficits - like Greece - and surpluses - like Germany or the Netherlands.

Barroso said he wanted the EU to make recommendations to these countries to curb such imbalances - which could see the EU lecture Germany to do far more to boost sluggish domestic demand for goods and services.

The EU commission will need the backing of EU governments before it can draft more detailed rules for them to vote on and put in place.

The executive also says it will also come up with "permanent crisis resolution" plan to replace the euro750 billion package of funds and debt guarantees agreed Monday for the next three years.

As a result of the bailout agreement, all eurozone countries in effect agree to shoulder the debts of countries that run into trouble - a commitment that troubles many in Germany, Europe's richest nation, which only reluctantly backed the deal.

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