Eurozone needs a 'shock absorption' fund
By Benjamin Fox
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'.
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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.