European policy makers dropped proposals for joint euro-area bond sales or a debt-redemption fund in a concession to German Chancellor Angela Merkel.
A roadmap for the overhaul of the crisis-hit euro zone deleted earlier calls for the “mutualization” of debt, aiming instead for a “common but limited” buffer initially financed by national contributions.
A euro-area “fiscal capacity,” conceivable some time after 2014, “could take the form of an insurance-type mechanism between euro-area countries,” according to the roadmap published by European Union President Herman Van Rompuy in Brussels today.
The blueprint showed that a German-led bloc that has underwritten the bulk of 486 billion euros ($635 billion) in loans pledged to fight the debt crisis has gained the upper hand in determining the shape of the currency union.
Merkel, the leader of Europe’s biggest economy and the dominant figure in the crisis management, is running for re-election next autumn on the promise that German taxpayers won’t have to pay more to combat the Greece-fueled crisis.
Until the end of 2013, the euro overhaul will focus on legislation already in the pipeline, including more EU powers to intervene in national budgets and the setup of a single banking supervisor. Finance ministers failed to agree on bank oversight this week and will meet again Dec. 12 to seek a deal.
Courting more political controversy, the roadmap set an end-of-2014 deadline for the setup of a central fund equipped to wind down failing banks. Such a fund could be financed by taxes on banks and perhaps tap the European Stability Mechanism, the euro zone’s emergency lender to counter the debt crisis, the proposal said.
Van Rompuy took lead responsibility for the document, drawing on input from European Commission President Jose Barroso, European Central Bank President Mario Draghi and Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro finance ministers.
Possible euro bill sales and a joint debt-redemption fund, which featured in an interim roadmap published in October, didn’t make it into the final version, to be discussed by EU leaders at a Dec. 13-14 summit in Brussels.
A budget for the euro zone would evolve in two stages, starting with “limited, temporary, flexible and targeted financial incentives” for countries that make binding commitments to economic reforms as of 2013. Merkel touted a similar idea in October.
In the next stage, after 2014, the budget would grow into an insurance fund to help well-managed economies “buffer large country-specific economic shocks” such as a jolt to energy prices, the proposal said. Countries would have to show economic fitness to access the fund.
Euro governments would pay into the fund and draw from it as the economy ebbs and flows, with tight conditions for disbursements to make sure that it doesn’t become a permanent transfer mechanism. Europe’s recent economic ups and downs show that the flows could go both ways.
Spain, for example, might have been a net payer into the fund as late as 2006 or 2007, when it was riding a real-estate boom that has since gone bust. Germany might have been a net recipient during the same phase, when its growth lagged behind the European average.
Payments to and from the fund would not “affect the overall level of public expenditure and tax pressure in the euro area,” the proposal said. “Over time, each euro-area country, as it moves along its economic cycle, would in turn be a net recipient and a net contributor.”
With negotiations bogged down over the existing budget for the 27-nation EU, equal to about 1 percent of the bloc’s gross domestic product, officials have been reluctant to put figures on a euro-area insurance fund. Guntram Wolff, deputy head of the Bruegel research institute, estimated in a Dec. 3 paper that it would take 2 percent of euro-area GDP to buffer national and regional shocks and address banking crises.
While the fund could be empowered to borrow on its own over the longer term, it wouldn’t absorb or manage national debts, which will continue to be sold and serviced by each country. One model is the U.S. system, in which most states are tied by balanced-budget rules and federal borrowing provides a shock absorber.
“A euro-area fiscal capacity could indeed offer an appropriate basis for common debt issuance without resorting to the mutualization of sovereign debt,” the proposal said.
European-level borrowing wouldn’t be new. Bonds are already sold by the European Investment Bank, the EU’s project-finance arm, and by the debt-crisis rescue funds.
Backers of euro bonds such as French President Francois Hollande can claim that the idea of mutual debt management lives on in other European proposals, such as a separate blueprint put out by the commission last week and cited in the summit documents.