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Roadmap to a unified eurozone

May 31, 2017

The European Commission has proposed the introduction of collective eurozone debt and a joint fiscal budget, as it unveiled a raft of controversial ideas for strengthening the often dysfunctional euro currency area.

Belgien EU-Kommission Pressekonferenz Pierre Moscovici
Image: Reuters/E. Vidal

In what it called a "reflection paper," the European Union's executive Commission on Wednesday spelled out ideas on measures it considers essential for deepening economic and monetary union in the course of the next eight years.

The paper proposes a permanent President of the Eurogroup - a kind of eurozone finance minister - who would be in charge of managing the 19-nation bloc's revenues, including borrowing and spending. Currently, eurozone finance ministers name one of their own as head of the group. This job should be merged with that of the economic affairs commissioner, the paper argues.

EU Economy Commissioner Pierre Moscovici told a news briefing in Brussels that the status quo was "not an option," adding that the currency area "must move forward."

EU Commission vice-president Valdis Dombrovskis said at the same briefing that the euro was "a promise of prosperity," and added: "To keep that promise ... we need the political courage to work on strengthening and completing Europe's economic and monetary union now."

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Common budget and debt

The Commission paper advocates the introduction of a eurozone budget to carry out what it calls a "macroeconomic stabilisation function," meaning effective crisis management in the case of economic shocks like a new financial crisis.

Another option could be for such a budget to operate as a re-insurance fund for national unemployment schemes during economic bad times, when national budget deficits run high.

Finally, the stabilisation function would include "a rainy day fund," regularly accumulating money and occasionally disbursing it when a large economic shock needs cushioning. The fund should have the right to borrow, albeit within limits, and with rules on saving money when times are good.

Highly controversial is a proposal to launch a market of Sovereign Bond-Backed Securities (SBBS). This would allow for the packaging of different countries' national debt into a new asset. The Commission hopes the plan will boost demand for debt issued by eurozone governments with relatively weak economies.

The SBBS would help break the interdependency of banks and sovereigns that led to the 2010 sovereign debt crisis in Europe by providing a "high quality safe asset" banks could hold without too much exposure to one sovereign, the Commission noted.

SBBS would also avoid old eurozone political battles over whether the currency bloc should issue common bonds - a move vehemently opposed by Germany.

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Ambitious timing 

In additional proposals, the paper urges the completion of the eurozone banking union that was initiated as an emergency measure amid catastrophic bank failures in Ireland, Spain and Greece. However, a European Deposit Insurance Scheme (EDIS) - the trickiest part of banking union - is also still resisted by Germany and others among the richer eurozone states. They are are concerned about the fragility of banks in countries such as Italy - and don't want their own national deposit insurance funds looted to compensate depositors in failing banks in other countries.

As a result, the paper divides the deeper integration ideas into two stages. Until 2019 - the next European parliamentary elections and the end of the current Commission - the focus would be on completing processes already started.

The eurozone would agree on EDIS, and for the eurozone bailout fund ESM to backstop a common bank resolution fund in case it runs out of money. It would also tackle non-performing loans in the European banking system.

In the second phase, between 2019 and 2025, the eurozone could fully implement EDIS, and consider creating the European safe asset and the eurozone treasury, budget and finance minister.

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uhe/nz (Reuters, AFP, dpa)