Euro Joint Bills, Budget Urged as Path Out of Debt Crisis

European leaders were urged to consider the pooling of national bill sales and setting up a euro-zone budget with its own borrowing powers as steps toward overcoming the debt crisis.

Bill sales “on a limited and conditional basis” could create a “genuine euro-area safe and liquid asset” that breaks the vicious circle of bank and sovereign debt, European Union President Herman Van Rompuy said in a position paper released today in Brussels.

An EU summit on Oct. 18-19 will test the appetite for joint short-term bills in top-rated countries such as Germany and Finland, which have ruled out a switch to a full-scale common borrowing system using euro bonds. EU countries plan to complete the roadmap toward a more integrated monetary union at a December meeting.

“I’m not making fully fledged proposals,” Van Rompuy told reporters in Helsinki today. “I’m only asking for further examination.” He said there’s no “clear-cut concept” of a euro-area budget at present and called on leaders to explore “how we can give stability to the euro zone and how we can help in some way countries embarking on structural reforms.”

‘Economic Shocks’

The euro extended gains after the report was published and traded at $1.2971 at 4:10 p.m. in Brussels, up 0.3 percent on the day.

Van Rompuy issued the proposals after consultations with European Central Bank President Mario Draghi, European Commission President Jose Barroso and Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-area finance ministers.

The paper was silent on the size of a possible euro-area budget, which could be used to buffer “country-specific economic shocks.” A euro-area treasury could have the power to borrow as another possible route to “fiscal risk sharing,” the paper said.

“There are various ways of progressing toward fiscal union,” according the paper. “The crisis has underlined the high level of interdependence between euro-area countries and even beyond. It has shown that national budgetary policies are a matter of vital common interest.”

‘Resolution Tools’

The report reinforced EU efforts to integrate its banking sector, endorsing current plans for a common supervisor and emphasizing the need to consider better ways to handle failing banks. The debt crisis has caused the financial sector to fragment, hurting credit markets and imposing increased cleanup costs on taxpayers.

“The absence of common bank resolution tools has hampered effective crisis management,” according to the report.

EU leaders decided in June to create a common bank supervisor at the European Central Bank to pave the way for direct bank bailouts from the euro area’s firewall fund. Creating a single supervisor should be “a matter of priority,” today’s report said.

Finance ministers meeting this week in Luxembourg acknowledged the EU is unlikely to implement the new supervision regime by the start of 2013 as initially hoped. Any delays mean a longer wait for Spain, which is looking to hand off its financial-sector rescue to the 500 billion-euro ($648 billion) European Stability Mechanism once the new system is in place.

Common Framework

Non-euro nations that join the common supervisor, which will oversee all banks within the single-currency bloc, should be treated fairly, according to the report. The new supervisor needs to strike a balance between rights and obligations for all participating nations, it said.

In the longer term, the EU needs a common framework for shutting down banks “swiftly, impartially and in the best interests of all,” backed by a common resolution authority “with an appropriate backstop.”

The report affirmed the EU’s plan to use the ESM to aid banks directly as long as there are appropriate conditions in place.

The report also called for national deposit guarantee schemes built on common standards. It did not include any mention of a cross-border deposit insurance fund, which had been an element of previous EU banking-union planning.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net; Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

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

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