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Euro zone may need treasury, minister, budget, bonds - EU Commission
May 31, 2017 / 11:28 AM / 6 months ago

Euro zone may need treasury, minister, budget, bonds - EU Commission

BRUSSELS (Reuters) - The European Commission said on Wednesday the euro zone might need to issue collective debt and run a joint budget among ideas for deeper European Union integration around the single currency after Britain leaves the EU in 2019.

In a reflection paper that aims to trigger a debate among euro zone governments, the EU executive spells out ideas on what could be done to deepen Economic and Monetary Union by 2025.

Scenarios of a finance minister managing common euro zone revenue, spending and borrowing had been worked on for months in Brussels, but now appear more likely since centrist former banker Emmanuel Macron became French president this month.

German conservatives dislike an idea they say could mean paying for poorer neighbors or irresponsible policies and are loath to mutualize debt among the 19 euro zone countries.

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 single currency area, the Commission said.

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.


The Commission avoids making any clear suggestions as to the evolution of the euro zone, leaving it up to EU governments to decide which of the ideas they like.

But it does say that in the later stages of 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 job of Eurogroup president itself could be integrated into the Commission, the paper says.

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 each country contributing a share of its GDP or tax income. It might also be allowed to borrowing on the market.

But irrespective of the financing method, the 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 too, 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.


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 European safe asset could be with full, partial or no mutualization of responsibilities for repayment, the Commission said, wary of the sensitivity of the issue for Germany, which vehemently opposed by Germany.

One idea in the paper that did not involve any mutualization of debt was for a private or public institution 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.

A paper prepared by the European Systemic Risk Board (ESRB) on SBBS last September also suggests the possibility of creating a European Debt Agency, which could issue such paper.

The SBBS would help break the interdependency of banks and sovereigns that led to the sovereign debt crisis, the Commission and the ESRB believe, providing a high quality “safe” asset banks could hold without too much exposure to one sovereign.

Standard & Poors rating agency, however, said on April 25 it would rate the SBBS only at BBB-, hardly the AAA rating the euro zone would seek.

Markus Ferber, the German Vice Chair of the European Parliament’s Committee on Economic and Monetary Affairs, criticized the SBBS idea in a letter to European Central Bank President Mario Draghi in March.

Ferber said it could easily lead to creating mutualized debt obligations if the SBBS was issued by a yet-to-be created European Debt Agency and that the same positive effect of the bonds without the risk could be attained by eliminating the risk-free status of government bonds in bank regulations.

“The only reason why we do not see privately initiated instruments that would correspond to what the ESRB suggests ... already ... is that sovereign exposures are treated in a very favorable way,” Ferber wrote in the letter.

The Commission put the idea of ending the risk-free status of government bonds in its paper as well.

The paper divides the deeper integration ideas 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

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