The finance ministers of the European Union on Monday agreed to tighten its budgetary rules and punish those member nations, who violate them in order to avoid recurrence of debt crisis witnessed in Greece earlier this year.
After months of negotiations, the finance ministers at a meeting in Luxembourg reached a deal on imposing sanctions on national governments, who fail to bring their debts under control.
And also to reduce their deficits to the level envisaged in the Growth and Stability Pact of the European Union.
The Stability and Growth Pact is an agreement among the 16 members of the EU.
Member nations are required not only to reduce their deficits to 3 per cent of their gross domestic product, but also to scale down their total debts to 60 per cent of the gross domestic product.
The new rules will initially apply to the 16 nations, which use the euro as their common currency, later will be extended to the rest of the 27-nation group, except Britain, which has opted out of its regime.
At present, most of the euro zone nations are in breach of the deficit and debt limits.
They will be given six months time to comply with the deficit limit and to significantly reduce their debts towards the 60 per cent GDP goal.
Those breaching the new rules will be asked to pay a fine, which will be deposited in a bank account.
Details of the proposed penalties are yet to be worked out, but they are expected to run into billions of Euros.
The heads of state and government of the EU are expected to endorse the new financial rules at a summit in Brussels at the end of this month.
The procedure for sanctions will become shorter and more efficient and they will be imposed by the EU finance ministers.
The finance ministers are in a position to waive the penalties and to give grace periods for governments to meet the budgetary rules.
The agreement among the finance ministers came after Germany and France sorted out their differences over tighter budgetary rules at a meeting between chancellor Angela Merkel and President Nicolas Sarkozy on Monday in the French resort of Deauville.
Germany had to give up its demand for 'automatic sanctions' on violators of the budgetary rules in the face of strong opposition from France, Italy and Spain.
Under a compromise deal reached by Merkel and Sarkozy, Germany yielded grounds to the French position that sanctions on those, who breach the budgetary rules could be imposed by the euro zone finance ministers if a majority EU nations vote for it.
In return, chancellor Merkel won Sarkozy's endorsement to amend the EUs Lisbon Treaty to strengthen the legal status of the new budgetary rules.
Imposing automatic sanctions was one of Germany's key demands to prevent a Greek-style debt crisis. Sarkozy said after his discussions with Merkel in Deauville that the Franco-German differences were ironed out and 'we are in the same boat.'
"If a nation having excessive debt takes no appropriate measures even after six months, then sanctions should be imposed," Sarkozy told a joint news conference with Ms Merkel.
In the past, the Growth and Stability Pact was repeatedly violated by several member nations, including Greece, endangering the stability of the ten-year old common currency.
Greece had accumulated a staggering debt of more than Euro300 billion and drove its budgetary deficit to more than 13.6 per cent of the gross domestic product.
In May, the Euro zone nations stepped in to avert a bankruptcy of heavily-indebted Greece by providing a rescue package of Euro110 billion.
The euro zone nations also put together a bigger bailout package of Euro750 billion (nearly a trillion dollars) to prevent the Greek debt crisis from spreading to other debt-laden euro zone nations such as Spain, Portugal and Ireland.
