Reuters: US Dollar Report: UPDATE 1-Euro zone sees euro bonds, treasury at end of fiscal union -document

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UPDATE 1-Euro zone sees euro bonds, treasury at end of fiscal union -document Jun 26th 2012, 09:28 Tue Jun 26, 2012 5:28am EDT * Euro zone could have treasury office, central budget * Fiscal union could lead to eurobonds, bills or redemption fund * Euro zone could set annual deficit, debt limits for countries * Euro zone could demand changes to budgets if they violate rules * ESM could backstop euro zone bank deposit and resolution funds By Luke Baker and Jan Strupczewski BRUSSELS, June 26 (Reuters) - The euro zone could create a treasury for the single currency and issue euro bonds as the final stage of a fiscal union which could take years to construct, according to a document prepared for this week's summit of euro zone leaders. "In a medium-term perspective, the issuance of common debt could be explored as an element of such a fiscal union and subject to progress on fiscal integration," said the report, obtained by Reuters. "Steps towards the introduction of joint and several sovereign liabilities could be considered, as long as a robust framework for budgetary discipline and competitiveness is in place to avoid moral hazard and foster responsibility and compliance," it said. The report was prepared by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank President Mario Draghi and President of the Eurogroup, Jean-Claude Juncker - a quartet with undeniable clout. Its aim is to identify what elements the euro zone should put in place over several years to complete the economic union among the 17 euro countries which they believe is essential to securing the currency bloc's future. Some elements may be put in place in the next year or so, others are likely to take much longer as they will require sensitive changes to the EU treaty. The report says the euro zone should push ahead with a banking union, a budgetary union, joint economic policy framework and to ensure all this has democratic support - so that voters in member states do not reject it on the grounds that too much power is shifting to Brussels. To make joint debt issuance possible, euro zone countries should be able to set annual deficit and limits for individual members of the single currency bloc and ask for changes to budgets if they broke agreed fiscal rules. If a country wanted to borrow more than agreed together with the euro zone, it would have to justify it and get prior approval. "The process towards the issuance of common debt should be criteria-based and phased, whereby progress in the pooling of decisions on budgets would be accompanied with commensurate steps towards the pooling of risks," said the report. "Several options for partial common debt issuance have been proposed, such as the pooling of some short-term funding instruments on a limited and conditional basis, or the gradual roll-over into a redemption fund," it said. "Different forms of fiscal solidarity could also be envisaged," said the document which will form the basis of euro zone talks towards a full fiscal union. EURO ZONE TREASURY, CENTRAL BUDGET The report said that a fully-fledged fiscal union would ultimately entail the creation at the euro area level of a fiscal body, to manage interdependencies of euro zone economies, such as a treasury office. "In addition, the appropriate role and functions of a central budget, including its articulation with national budgets, will have to be defined," it said. The euro zone would also have to come up with a way to enforce economic policy coordination, especially in the areas of labour mobility and tax coordination. But because all this would entail the surrender of fiscal sovereignty, which is the prerogative of national parliaments, the report stresses the need to get national and EU lawmakers on board, something that has proved difficult in the past. "Moving towards more integrated fiscal and economic decision-making between countries will therefore require strong mechanisms for legitimate and accountable joint decision-making," the report said. "Building public support for European-wide decisions with a far-reaching impact on the everyday lives of citizens is essential," it said. A euro zone banking union, needed to break the vicious circle between indebted sovereigns and weak banks, which hold bonds of the indebted governments, would entail integrated European supervision, deposit guarantees and bank resolution. The bank supervision should have a national and a European level but it would be the EU level that has the ultimate responsibility of supervision over all EU banks and pre-emptive intervention power. The European Central Bank could play that role for euro zone banks. A European bank deposit guarantee scheme would build on existing national plans and be overseen by the European supervisor. The bank resolution scheme, funded by fees from banks, would be used to wind down non-viable banks. Both could be set up under the control of a common resolution authority. "Nevertheless, the credibility of any deposit guarantee scheme requires access to a solid financial backstop. Therefore, as regards the euro area, the European Stability Mechanism could act as the fiscal backstop to the resolution and deposit guarantee authority," the document said. Link this Share this Digg this Email Reprints

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