Friday

29th Mar 2024

Eurozone needs a 'shock absorption' fund

  • A road-map for the eurozone? (Photo: guysie)

A eurozone-wide 'shock absorption' fund should be created to assist countries in economic difficulty, according to a paper that will take centre stage at next week's EU summit.

The paper "Towards a genuine economic and monetary union", put together by European Council President Herman Van Rompuy, maps out a road-map for the eurozone featuring a comprehensive rulebook on banking union and its own 'fiscal capacity'.

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

But it kicks the prospect of further revisions of the EU treaties to create a mutualised debt regime through either Eurobonds or euro bills into the long-grass.

Under the proposals, the EU would prioritise completion of the three prongs of a banking union in 2013. This would include harmonised deposit guarantee schemes to protect savers, and resolution frameworks to wind-up failed banks, sitting alongside the supervision mechanism policed by the European Central Bank (ECB).

Agreement on the banking union framework is seen as "top, top priority" said an EU contact.

The paper also foresees that the legal framework for the ESM to begin direct bank recapitalisations should be in place by March 2013.

The recommendations, which include eurozone countries agreeing formal contracts with the EU on their national reforms, will then be the basis for discussion during the summit.

Although Van Rompuy is believed to be privately sympathetic to the idea of joint liability eurobonds, the concept of mutualised debt remains a taboo particularly in Germany, Finland and the Netherlands.

"A lot of people are not ready intellectually let alone politically to discuss this," said the contact.

In addition, creating a system of sovereign debt mutualisation or a temporary Redemption Fund would require changes to the EU treaties.

The paper talks of a 'shock absorption' function that could "take the form of an insurance-type system between euro area countries", with national contributions and payments varying according to economic performance.

The regime would be compulsory for the 17 countries using the euro and voluntary for the other 10 EU countries, raising the prospect of a widening divide between member states in and outside the eurozone. There is no speculation on the possible size of the fund.

The council envisages the fund to be used alongside the European Stability Mechanism bail-out fund, but not for crisis management.

With the treaty containing the no bailout' clause (Article 125), the paper states that the 'absorption capacity' facility should "be structured in such a way as they do not lead to unidirectional and permanent transfers between countries, nor should they be conceived as income equalisation tools", adding that "appropriate mechanisms to limit moral hazard and foster structural reforms should be built in the shock absorption function."

Senior EU sources insist that an EU-wide deposit guarantee scheme would not be necessary if a bank resolution fund and strong supervisory mechanism are put in place.

The paper argues that the European Resolution Fund would be funded by "risk-based levies on all the banks directly participating in the single supervisory mechanism (SSM)".

Moreover, since access to monies from the ESM or the 'absorption fund' would be conditioned on governments pushing through structural reform programmes, and only available to countries having difficulties with debt financing, officials believe that "with the ESM and the 'absorption fund' you can have the same provisions as the Redemption fund".

The paper also opens the door to creating a eurozone budget with the capacity to raise its own taxes, as well as the ability to borrow and issue its own bonds.

"A euro area fiscal capacity could indeed offer an appropriate basis for common debt issuance without resorting to the mutualisation of sovereign debt," says the paper.

It would also "require the establishment of a Treasury function with clearly defined responsibilities."

EU finance ministers will meet next Wednesday (12 December) on the eve of the Council summit in a bid to finalise the rules establishing the ECB as the single supervisor for the European banking sector.

Although EU leaders agreed to sign off on the supervision package before the end of 2012, officials acknowledge that the final deal is likely to adopted only in January 2013.

Eurozone needs 'limited fiscal solidarity'

The eurozone should consider introducing treasury bills, a special budget and a finance ministry, says a new ideas paper ahead of next week's summit.

Franco-German rift derails banking union deal

EU finance ministers will return to Brussels on the eve of the December EU summit next week for last ditch talks on the controversial banking union proposals, after failing to reach agreement on Tuesday.

Germany to EU: stop talking about new budget schemes

German officials are in eye-rolling mode ahead of an EU summit about plans to create a eurozone "shock absorption fund" and say leaders should focus on reforms and stick to their promises.

Agenda

Minimal changes to euro structure at this WEEK's summit

EU leaders gathering for their sixth summit this year are likely to fudge plans for more integration in the eurozone that were originally aimed at calming market fears about the survival of the euro.

Opinion

Why UK-EU defence and security deal may be difficult

Rather than assuming a pro-European Labour government in London will automatically open doors in Brussels, the Labour party needs to consider what it may be able to offer to incentivise EU leaders to factor the UK into their defence thinking.

Latest News

  1. Kenyan traders react angrily to proposed EU clothes ban
  2. Lawyer suing Frontex takes aim at 'antagonistic' judges
  3. Orban's Fidesz faces low-polling jitters ahead of EU election
  4. German bank freezes account of Jewish peace group
  5. EU Modernisation Fund: an open door for fossil gas in Romania
  6. 'Swiftly dial back' interest rates, ECB told
  7. Moscow's terror attack, security and Gaza
  8. Why UK-EU defence and security deal may be difficult

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Stakeholders' Highlights

  1. Georgia Ministry of Foreign AffairsThis autumn Europalia arts festival is all about GEORGIA!
  2. UNOPSFostering health system resilience in fragile and conflict-affected countries
  3. European Citizen's InitiativeThe European Commission launches the ‘ImagineEU’ competition for secondary school students in the EU.
  4. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  5. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  6. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA

Join EUobserver

EU news that matters

Join us