EU proposals to explore budget and tax co-ordination

The 1992 Maastricht Treaty led to adoption of the euro currency some seven years later, although economists at the time warned that different member-state fiscal systems, imperfect labour mobility and the lack of a European political union could pose problems for the currency club in the future.

Recent events in Greece have served to highlight the eurozone's weaknesses, with European Commission President Jose Manuel Barroso saying last week there is increased appetite in national capitals for greater economic co-ordination as a result.

"The fiscal crises in some of our member states have highlighted also the consequences some mistakes made in one country may have on other countries," he told journalists in Brussels.

The commission's communication is to outline a number of potential mechanisms "to ensure the proper functioning of economic and monetary union."

Among the ideas is greater eurozone tax co-ordination, said the EU official, with France and Germany long complaining that countries with low tax rates undermine their capacity to pay for generous state-provided services.

An upcoming report on the completion of the EU's single market by former commissioner Mario Monti is also set to highlight the need for greater European tax co-ordination.

The EU official also signaled that the commission's communication would explore the idea of greater eurozone member-state examination of each others national budgets, although details are still hazy.

Former French prime minister Edouard Balladur recently presented his own ideas paper to the French government for greater eurozone co-ordination, under which euro area members would have to submit their annual budgets to the 16-country bloc for majority approval.

Preventative arm

Debate has centered this week on the need for a European Monetary Fund, an additional corrective arm capable of providing loans to member states struggling with financing difficulties, as currently seen in Greece.

The commission and a number of eurozone members are keen to introduce greater preventative measures however, to prevent the build-up of structural imbalances that lead to budgetary problems in the future.

"It has been known for a long time that public sector salaries in Greece were too high, but we could not do anything," said the EU official.

As a result, the commission's communication is set to propose that a wider range of economic indicators be used when assessing the health of a eurozone economy.

If agreed and turned into legislation, the commission and eurozone members could call on a particular government to correct economic structural flaws, such as excessive public sector salaries, at an earlier stage than currently permitted.