By Jan Strupczewski
BRUSSELS (Reuters) – The EU executive will suggest on Wednesday the euro zone might need to issue collective debt and run a joint budget, among proposals for bolstering the single currency that echo ideas from new French President Emmanuel Macron.
People familiar with the European Commission reflection paper told Reuters the scenario of a finance minister managing common revenue, spending and borrowing had been worked on for many months in Brussels, but now appears a much more likely option since centrist former banker Macron won power on May 7.
German conservatives dislike an idea they say means paying for poorer neighbors. But Chancellor Angela Merkel, seeking re-election in September, has welcomed Macron’s victory and EU officials said they hoped governments might start working on a plan to forge a more cohesive euro zone from next year.
The Commission paper examines possible reforms to the bloc after the 2010-2012 sovereign debt crisis that nearly destroyed it and which triggered a wave of quick fixes for its weak spots.
While some problems have been addressed, there is a lot more EU governments need to do to have an optimally functioning Economic and Monetary Union (EMU), the Commission will say.
The document, part of a wider series on the future of the European Union, comes as the EU is to start talks with Britain on the terms of its withdrawal – a great setback to European integration but one that will see the euro zone make up nearly four-fifths of the EU’s economy, up from two thirds today.
NO BLUEPRINT, JUST IDEAS
The Commission will avoid making any clear suggestions as to the evolution of the single currency area, leaving it up to EU governments to decide which of the ideas they like.
But it does say that in the later stages of deepening euro zone integration, not least because it would require politically difficult and time-consuming changes to EU treaties, the bloc could establish a euro zone treasury.
The chairman of euro zone finance ministers, the Eurogroup, could be in charge of such a new institution, the Commission will say. But it will also note that the job of Eurogroup president itself could be integrated into the Commission.
The treasury could manage what the Commission calls a “macroeconomic stabilization function” – EU jargon for a euro zone budget to mitigate economic shocks, for instance used to support investment, which is the first victim of a downturn.
Another option could be for such a budget to operate as a re-insurance fund for national unemployment schemes during economic bad times, when national budget deficits run high, but this would require prior convergence of labor market policies.
Finally, the “stabilization function” could be a rainy day fund, regularly accumulating money and disbursing to cushion a large shock and could even have right to borrow, though within limits and with rules on saving money when times are good.
Financing for the euro zone budget could come from the euro zone bailout fund, the wider EU budget, or from separate sources like each country contributing a share of its GDP or tax income, or from direct borrowing on the market.
Irrespective of the financing method, however, the euro zone budget could not lead to permanent transfers or moral hazard or be a crisis management tool – a role already assigned to the euro zone bailout fund, the European Stability Mechanism.
While non-euro zone countries could have access to the budget as well, it would only be available to those who are in line with EU budget rules and recommendations for reforms that lead to greater convergence of EU economies.
EUROPEAN SAFE ASSET
The treasury could also be allowed to borrow through what the Commission calls a “European safe asset” – a bond denominated in euros that could become a benchmark for European financial markets once there is enough of it in circulation.
The Commission will say, however, the European safe asset could be with full, partial or no mutualization of the debt as the topic of joint debt issuance in the euro zone is highly controversial and vehemently opposed by Germany.
One idea in the paper that did not involve any mutualization of debt was for a private bank to buy a portfolio of euro zone government bonds and issue its own bond backed by that portfolio. Such a Sovereign Bond Backed Security (SBBS) could have senior and junior tranches and provide a higher level of safety for the investor, officials said.
Such a bond would help break the interdependency of banks and sovereigns that led to the sovereign debt crisis. Another idea to consider would be to end the risk-free status of government bonds in bank regulations, officials said.
The paper will divide the process of deeper euro zone integration into two stages. Until 2019 – the next European parliamentary elections and the end of the current Commission — the focus would be on completing processes already started.
The euro zone would agree on a European Deposit Insurance Scheme (EDIS), and for the bailout fund to backstop a common bank resolution fund in case it run out of money. It would also tackle non-performing loans in the European banking system.
Also by 2019 the euro zone would make progress on a Capital Markets Union – a project to create more sources of funding to households and businesses on a market now dominated by banks.
In the second phase, between 2019 and 2025, the euro zone could fully implement EDIS, consider creating the European safe asset and the euro zone treasury, budget and finance minister.
(Reporting by Jan Strupczewski; editing by Mark Heinrich)