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EU struggles over ways to prevent new debt crisis

BRUSSELS – After months of agonizing, leaders of the European Union are closing in on new oversight rules to ensure sound finances, prevent another government debt crisis and restore the credibility of the euro.

But leaders remain divided on key issues. And some analysts argue that even the latest proposals can’t fix the bloc’s fundamental problems.

EU finance ministers will try to sort out two different proposals for stricter rules to back up the euro when they meet Monday and Tuesday in Luxembourg, in hopes of a decision at a summit by heads of state and government Oct. 28-29.

The proposals spell out sanctions for countries who run up deficits and debts that are too big – overspending that could undermine the shared euro currency, as Greece did when it almost went bankrupt in May and had to be bailed out by eurozone governments and the International Monetary Fund.

A key thorny question will be whether the European Commission, the EU’s executive arm, will get greater powers to monitor troubling developments in individual countries’ economies – such as trade imbalances or real estate bubbles – and to fine countries that don’t follow its recommendations.

In its proposals announced last month, the commission gave itself exactly those powers.

Many economists argue that private debt levels and inflated wages, rather than government debt and deficits, were the main culprits behind the crises in some countries with troubled government finances such as Ireland and Spain. At the end of 2007, for instance, Ireland’s debts stood at only about 25 percent of gross domestic product – well below the EU’s 60 percent ceiling – but labor costs and house prices had jumped in the past decade.

When the crisis hit and economies shrank, banks were left with mortgages and debts that couldn’t be repaid by people who had lost their jobs or part of their salary. That kicked off a spiral of falling house prices and failing banks, which governments were forced to bail out, in turn piling up huge deficits.

But governments are starting to push back against the European Commission’s efforts to have more say about their economies. The tougher oversight of imbalances proposed by the Commission may not make it into a competing set of rules being drawn up by a group led by Herman Van Rompuy, head of the European Council of heads of state and governments.

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