BRUSSELS, Sept 7 (Reuters) - Euro zone integration could include sovereign insolvency rules to help discipline governments on fiscal rules, especially if the bloc were to create its own central budget, Slovak Finance Minister Peter Kazimir said.
His remarks play into a larger debate about the future of the single currency area, now comprising 19 countries. Its two biggest economies, France and Germany, are pushing for more integration in the wake of Britain’s scheduled exit from the EU in early 2019.
Ideas that have been floated include a special euro zone budget, a treasury and a finance minister, turning the euro zone’s ESM bailout fund into a European Monetary Fund and possibly some form of jointly issued debt - a euro zone safe asset.
In a speech at an event organised by the Bruegel think-tank, Kazimir said a euro zone fiscal capacity - European Union jargon for a budget - was needed to make up for the loss of monetary and exchange rate policy in euro zone countries.
But Kazimir, whom euro zone officials mention as a potential candidate to replace Jeroen Dijsselbloem as chairman of the bloc’s finance ministers group, stressed that a shared budget could not possibly be created without fiscal discipline.
“The current enforcement mechanism (of fiscal discipline) is questionable. On paper, everything works fine, but you know how it is in practice,” Kazimir said.
He said more discipline imposed through some new euro zone central authority would only trigger more anti-EU sentiment, which was already vibrant after the sovereign debt and migration crises. On the other hand, completely automatic sanctions, which some have proposed, would entail that the rules are perfectly suited to all countries and circumstances, which was unrealistic.
“The second way, a fully credible no-bailout rule, basically means introducing an insolvency procedure for sovereigns. That is a very hot potato,” Kazimir said.
He noted that for such a procedure to be introduced, other elements would have to fall into place as well.
“I think a full no-bailout rule could work – if all the proper checks and balances on the market are in place,” he said.
“Specifically, a fully functional banking union, common mechanisms against shocks, and last but definitely not least, the European safe asset,” he said.
Kazimir said completing the banking union, which would entail agreeing on a joint deposit guarantee scheme and a backstop for the EU’s Single Resolution Fund for banks, would be necessary.
“Otherwise, the insolvency of one member state could threaten the national banking system – and then, in turn, drag down the financial system in the rest of the euro zone,” he said.
If there were to be no bailouts, a euro zone budget would become even more important to cushion shocks that are too large for national fiscal policy to deal with but not so bad as to call in the euro zone bailout fund ESM, he said.
“The fiscal capacity should step in and prevent such moderate shocks from turning into catastrophic ones,” he said.
“Finally, the safe asset is needed in order to prevent self-fulfilling prophecies, when market overreaction pushes countries into insolvency, even though this there is no good fundamental reason for that,” he said. (Reporting By Jan Strupczewski; Editing by Hugh Lawson)