Euro-Area Debt Pooling Abandoned by Parliament in Budget LawJonathan Stearns
European Parliament negotiators abandoned a demand for a fast-track move toward debt pooling by euro governments at the insistence of a German-led group of nations opposed to such an anti-crisis step.
As part of an accord with European Union governments on stricter budget-oversight rules, representatives of the EU Parliament discarded its appeal for a fund to pool and help repay the debts of nations using the euro. Last June, the assembly voted to create a “European redemption fund” in a bid to link a policy opposed by German Chancellor Angela Merkel to draft deficit-control legislation she has championed.
“We knew how difficult it was,” Elisa Ferreira, a Portuguese member helping to steer the measures through the 27-nation Parliament, told reporters today in Brussels. “More preparation is needed.”
The climbdown clears the way for the EU to gain the power to screen the budgets of nations earlier and monitor more closely countries where rising borrowing costs threaten financial stability. The EU will also tighten fiscal surveillance of nations such as Greece, Ireland and Portugal after they exit rescue programs.
The two pieces of draft legislation complement 2011 laws that granted the EU stronger powers to sanction spendthrift euro-area countries. The latest rules, dubbed the two-pack, also follow a new European treaty aimed at limiting budget deficits.
Seeking to contain the three-year-old debt crisis, Europe is wrapping up decisions on closer fiscal surveillance while examining ways to kick-start economic growth weakened by the budget-austerity drive. Last year, EU governments discussed the scope for growth-boosting initiatives within the deficit-cutting context and gave nations such as Greece more time to meet targets for narrowing budget shortfalls.
The EU Parliament said Europe must go further through euro-area debt pooling, which Germany, other nations and the European Commission say is premature and requires a European treaty change. The Parliament’s amendment that is being dropped called for countries to transfer debt exceeding the EU threshold of 60 percent of gross domestic product into a redemption fund and repay this money over 25 years, while cutting budgets and taking steps to promote economic growth.
In a sign of the strength of political opposition to such a step in AAA rated euro countries such as Germany and the Netherlands, EU President Herman Van Rompuy in December deleted earlier calls for the “mutualization” of debt in a roadmap for revamping management of the European single currency.
In a concession today to the EU Parliament, European Economic and Monetary Affairs Commissioner Olli Rehn agreed to create an “expert group” to assess the feasibility of debt pooling in the euro area and produce a report by March 2014. The commission, the EU’s regulatory arm, in 2011 published a paper outlining options for joint bond sales by euro governments, held consultations on the matter and hasn’t taken further action.
“The guiding principle is that any steps of further mutualization of risk must go hand-in-hand with greater fiscal discipline and integration,” Rehn told reporters today.
Cyprus in June became the fifth euro-area nation to ask for a financial rescue since Greece triggered the European debt crisis in late 2009. Greece received an initial aid package in 2010 and a second rescue a year ago. The other three countries are Ireland, Portugal and Spain.
Cyprus’s request, still being negotiated, follows 486 billion euros ($652 billion) in European and International Monetary Fund commitments for Greece, Ireland, Portugal and Spain’s banking system since 2010. It also follows a European Central Bank announcement in September of a bond-buying program for euro nations willing to sign up to austerity conditions.
The new package of more-intrusive EU fiscal surveillance of countries would let the commission examine their draft budgets before approval by national parliaments. Annual spending plans would have to be submitted to the Brussels-based commission by Oct. 15 the previous year.
In addition, the commission would gain the right to closer oversight of euro nations facing growing financial difficulties through “regular review missions.” Such a step would institutionalize an informal practice under which, for example, the EU in 2011 dispatched experts to Rome to monitor Italian budget progress.
Furthermore, euro-area countries emerging from aid programs would be subject to a new surveillance system under the draft legislation.
The new rules “will allow a further significant strengthening of economic governance in the euro area and is a major stepping stone toward the creation of a true and genuine economic and monetary union, of rebuilding the economic and monetary union,” Rehn said.
The commission proposed the legislation in November 2011, when its president, Jose Barroso, said that “without stronger governance in the euro area, it will be difficult if not impossible to sustain a common currency.”
Today’s negotiated accord still needs the approval of the full EU Parliament on the one hand and of national finance ministers collectively on the other. That’s usually a formality after negotiators for the assembly and governments strike deals.
In addition to dropping their provision on a debt-redemption fund, the Parliament representatives abandoned an amendment from June to establish a European procedure for legal protection for a country at risk of defaulting -- a proposal that followed euro-area policy zigzags over Greece that ended with the country carrying out the world’s biggest writedown of privately held debt in early 2012.
Under this amendment, which governments opposed, a decision to place a nation under legal protection would have rendered standard default practices inoperative, frozen loan interest rates and given creditors two months to make themselves known to the commission or forfeit their claims.