01/28/2012 08:55 EST | Updated 03/29/2012 05:12 EDT

German proposal seeks EU commissioner with sweeping powers to directly control Greece's budget

BERLIN - Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.

The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions."

But the German official said the initiative is being discussed among the 17-nation currency bloc's finance ministers because Greece has repeatedly failed to fulfil its commitments under its current €110 billion ($145 billion) lifeline.

The proposal foresees a commissioner holding a veto right against any budgetary measures and having broad surveillance ability to ensure that Greece will take proper steps to repay its debt as scheduled, the official said. The person spoke on condition of anonymity because the talks are confidential.

Greece's international creditors — the International Monetary Fund, the European Union and the European Central Bank — already have unprecedented powers over Greek spending after negotiating with Athens stringent austerity measures and economic reforms in return for the first bailout.

The so-called troika of creditors is currently negotiating another €130 billion rescue package for the heavily indebted country. German news magazine Der Spiegel on Saturday cited an unnamed troika official as saying Greece might actually need a €145 billion package because of its prolonged recession.

The German proposal, first reported by the Financial Times, is likely to spark controversy in Greece.

Despite the quick rejection from the EU Commission, Germany's demand underlines the frustration of the eurozone with Greece's slack implementation of the promised reforms, spending cuts and privatizations. During every verification mission last year, the troika found huge implementation shortfalls, which in turn increased gaps in Athens' budget and intensified the need for a second bailout.

A powerful budget commissioner would further diminish the political leeway of Greece's government, just as politicians there are gearing up for an election set to take place this spring.

A government official in Athens said a similar proposal had been floated last year but got nowhere. Greece would not accept such a measure, he added. The official spoke on condition of anonymity because no formal proposal has been made by the EU or Germany yet.

The unprecedented and sweeping powers for creditors would indeed deal a huge blow to Greece's sovereignty, but they could help mobilize more support for the government in Athens from its European partners.

Several German lawmakers have repeatedly said that giving more money to Greece is unthinkable without stricter enforcement and control of the conditions attached to the rescue packages.

Greece is currently locked in a twin effort, seeking to secure a crucial debt relief deal with private investors while also tackling the pressing demands from its European partners and the IMF for more austerity measures and deeper reforms.

Failure on either front would force the country to default on its debt in less than two months, pouring new fuel on the fires of Europe's debt crisis.

In that case, Greece would likely leave the eurozone, which would bring disaster to the country, destabilize the currency bloc, fuel panic on financial markets and ultimately threaten the fragile world economy.

Despite two weeks of intensive talks, a debt relief agreement with private investors worth some €100 billion has yet to be reached.

Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos met anew with representatives of international banks and other private institutions Saturday, with a final deal being very close, officials in Athens said.

A statement from the creditor representatives said the two sides are "close to the finalization" of the voluntary writedown that would roughly halve Greece's privately held debt. "We expect to conclude next week as discussions on other issues move forward," they said.

The statement also referred to a previous framework agreement which indicated that the creditors have accepted an interest rate below 4 per cent for the new bonds to be issued in place of the old ones — a very favourable rate that will make it easier for the Greek government to service its debt.

With the current troika mission still ongoing and no final deal with the private sector creditors, Greece is unlikely to feature prominently at a summit of the EU's 27 leaders Monday, according to officials in Brussels.


Demetris Nellas in Athens and Gabriele Steinhauser in Brussels contributed to this report.