France, Germany push plan for EU budget sanctions

European flags are seen outside the European Commission headquarters in Brussels June 30, 2010.

PARIS (Reuters) - France and Germany urged the European Union on Wednesday to impose tougher sanctions on serial budget deficit offenders, including stripping them of their voting rights in the euro zone.

The Franco-German proposal, made in a joint letter and approved by a French cabinet meeting attended by German Finance Minister Wolfgang Schaeuble, forms part of European efforts to repair damage from the Greek debt crisis along with bank stress tests due to be published on Friday.

"We're sure that these bank tests and measures such as deficit cutting and tougher rules for the Stability and Growth Pact will allow us to restore confidence ... in the stability of Europe and the stability of the euro," Schaeuble told a joint news conference with his French counterpart Christine Lagarde.

The document, addressed to European Council President Herman Van Rompuy, added little to proposals already made by the European Commission and Germany, many of which have already been endorsed in principle by EU finance ministers.

They called for tougher penalties, including a temporary suspension of the euro zone voting rights of a country in persistent breach of the EU's budget deficit limits, but acknowledged that this may require a change in the EU treaty.

"In the short term, a non-binding political alternative could take the form of a political accord that could allow euro area member states either to bar an offending Member State ... from taking part in specific votes ... or to make a political commitment to neutralise the effect of that member's vote," the letter said.

States that failed to make sufficient progress on deficit reduction should be forced to make an interest-bearing deposit with the European Commission, the two countries said.

They also called for strengthening peer surveillance to ensure better budget coordination, and broader monitoring of gaps in competitiveness, structural reforms and private debt.

EU finance ministers agreed in principle on all these points in recent weeks.

TREATY REFORM UNREALISTIC

President Nicolas Sarkozy had already endorsed the German idea of suspending the voting power of a repeat budget sinner, but Paris officials say privately that anything that requires a new treaty negotiation is unrealistic, given the lengthy and uncertain ratification process.

The joint letter made no mention of German proposals, opposed by Paris, to establish an insolvency procedure for states unable to pay their debts.

However it called for the establishment in the medium term of "a credible crisis resolution framework that respects the budget prerogatives of each member state".

Schaeuble, the first foreign government member to attend a French cabinet meeting, said he was convinced that strengthening fiscal discipline and conducting EU-wide stress tests on banks would restore confidence in the euro.

At the session with Schaeuble, Sarkozy called for France and Germany to work towards fiscal convergence, beginning with a joint inventory of the two countries' tax and budget systems by the French Court of Auditors and its German counterpart.

The aim was that "our two governments are in a position to take decisions to move towards a necessary fiscal convergence both on business taxation and on personal taxation", Sarkozy said in a statement.

The statement did not spell out whether the two countries would harmonise their tax rates, which are widely different.

Schaeuble made no comment on the French idea.

France collects less in income tax and far more in indirect taxation than Germany. It also has a wealth tax, abolished in Germany after a constitutional court ruling in 1995.

The overall tax burden in France amounted to 42.8 percent of gross domestic product in 2008, compared with 39.5 percent in Germany. However, French public spending is much higher at 55.6 percent of GDP in 2009 compared with 47.6 percent in Germany.

"The convergence of our fiscal systems is an essential element of our economic integration and the deepening of the European internal market," Sarkozy said.

(Reporting by Daniel Flynn, writing by Paul Taylor; Editing by Toby Chopra/Ruth Pitchford)