The European Commission has revived the notion of debt mutualisation between euro zone countries in an ambitious new plan to reinforce the single currency.
With the debt crisis still unresolved, the commission set out a sweeping “blueprint” for an incremental but far-reaching overhaul of the euro zone in the years ahead.
Only one year after the adoption of the fiscal treaty, the new plan would go further still to sharpen Europe’s oversight of national budgetary policy.
“There are now still important challenges to the success of the EU, to the success of the single market and to the very existence of the economic and monetary union itself,” commission chief José Manuel Barroso told reporters.
In defiance of Germany, the plan seeks to put commonly issued eurobonds back on Europe’s political agenda.
Even as the debt crisis worsened in the past two years, chancellor Angela Merkel and her government largely succeeded in quashing debate on this subject.
The commission foresees more changes to the EU treaties, which would probably necessitate another Irish referendum, and points to a two-speed EU in which euro zone countries harmonise their affairs faster than the others.
Structural reforms
The plan also includes a dedicated euro zone budget to support structural reforms in a “large economy” in distress.
While suggesting that member states would enter a compulsory “contractual” arrangement with the commission to execute structural reforms, the plan also holds out the prospect of financial support for such reforms. The document proposes measures to be taken within the next 18 months under existing law as well longer-term steps over a five-year horizon and beyond.
At least for short-term term debt, the commission document foresees that German objections to common issuance could be overcome within five years. “The common issuance by euro area member states of so-called eurobills – short-term government debt with a maturity of up to one to two years – could constitute a tool against the present fragmentation, reducing the negative feedback loop between sovereigns and banks, while limiting moral hazard,” the document says.
“The introduction of such a common debt instrument would require a closer co-ordination and supervision of member states’ debt management in order to ensure sustainable and efficient national budgetary policies.”
Bank body
The commission is also urging member states to set up a new European body to take charge of failing banks, saying costs should be borne by the banking sector and not by taxpayers.
Mr Barroso is one of four EU figures – alongside Herman Van Rompuy of the European Council, Mario Draghi of the European Central Bank, and Jean-Claude Juncker of the euro group of finance ministers – tasked with making proposals to overhaul the euro zone to heads of state and government.
Barroso’s blueprint: Main points
Short term (six to 18 months) :
Complete “banking union” plan, including single supervisor and single resolution mechanism .
Strengthen economic governance via “contractual” arrangements between member states and commission.
Medium term (18 months to five years):
Deeper co-ordination, endorsement and surveillance of national budgets at EU level, including tax and employment policy.
Redemption fund subject to strict conditionality and euro- bills could also be considered to help with debt reduction and stabilise financial markets.
Longer term (beyond 5 years):
Autonomous euro area budget to support member states affected by shocks.
Common issuance of public debt.
