Rehn Says EU Must Move to Debt Sharing to Tame Financial Turmoil

European Union policy makers must move toward greater risk sharing as efforts to contain the euro area’s financial crisis have failed to tame the turmoil, EU Economic and Monetary Affairs Commissioner Olli Rehn said.

“In the financial circles, few doubt that it makes economic sense to create a deep, liquid and stable market for government bonds with the joint issuance of public debt,” Rehn said today in Brussels, according to the text of speech prepared for delivery to a Goldman Sachs (GS) Group Inc. conference in Brussels today that was not open to the press.

“But this process has to provide an answer to the concerns about moral hazard, or a possible free-riding on the budgetary prudence and economic strength of others,” Rehn said.

Rehn called for the EU to pursue a banking union with common backstops and stronger, more coordinated supervision. He also said the EU should investigate joint debt proposals, such as the redemption fund suggested by the German Chancellor Angela Merkel’s council of economic advisers, along with stricter fiscal controls.

Rehn said the European Central Bank has played an “important role” to ensure monetary and financial stability, and he also noted steps by some EU members to increase the pace of budget cuts and policy changes. Without these reforms, the EU faced “terrible depression” and a possible breakup.

“These actions have contained the crisis -- but not tamed it, not to speak of overcoming it,” Rehn said. “It is evident that our actions have been insufficient with the view of the challenges and the length of the rebalancing process across Europe,” Rehn said.

To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net