Bloomberg News

EU Seeks Tougher Budget Oversight, Floats Euro-Bond Options

November 24, 2011

(Updates with comments by Barroso in fourth paragraph. For more on Europe’s sovereign-debt crisis, see EXT4.)

Nov. 23 (Bloomberg) -- European Union regulators pushed for more budget control over euro-area nations to ease the debt crisis, heeding German demands in return for offering less creditworthy governments the prospect of joint bond sales.

Weeks after winning a year-long battle for stronger powers to sanction spendthrift euro countries, the European Commission proposed adding the right to screen national budgets earlier and monitor more closely nations such as Italy where rising borrowing costs threaten financial stability. The commission, the EU’s regulatory arm, also asked for tighter fiscal surveillance of nations such as Greece, Ireland and Portugal after they exit rescue programs.

In exchange, the commission advanced the idea that the German government opposes of bonds sold jointly by the euro area’s 17 nations by outlining three options for such debt issuance. It said two of the three options would probably involve the lengthy process of changing the EU treaty and all of them would require reinforced fiscal oversight.

The goal is “stronger budgetary discipline in the euro area,” commission President Jose Barroso said at a press conference today in Brussels. “Without stronger governance in the euro area, it will be difficult if not impossible to sustain a common currency.”

Financial Downturn

Facing Group of 20 calls to end the two-year-old debt crisis, prevent another financial downturn and preserve its monetary union, the euro area is fashioning a German-designed regulatory straitjacket for high-debt members. German Chancellor Angela Merkel wants the tighter framework as a condition for further financial support of weaker euro economies, which have received taxpayer-funded aid packages totaling 386 billion euros ($519 billion) and benefited from controversial European Central Bank bond purchases.

At stake is whether Spain, Italy and France become engulfed by debt troubles that forced Greece to seek an initial rescue in April 2010, pushed Ireland and Portugal into aid programs over the ensuing year and led to a second Greek bailout last month. The piecemeal approach to crisis-fighting may give way to a grand bargain in which unprecedented European curbs on national spending are the German price for a firewall that France has demanded to stem debt-market contagion.

“We suspect this spells the death of ‘muddle-through’ as market pressures effectively force France and Germany to strike a momentous deal on fiscal union,” Credit Suisse said in a Nov. 21 note to investors. “In short, the fate of the euro is about to be decided.”

Draft Budgets

Today’s proposals for more intrusive European fiscal surveillance of euro-area countries would let the commission examine their draft budgets before approval by national parliaments. Annual spending plans would have to be submitted to Brussels the previous autumn.

In addition, the commission would gain the right to closer oversight of euro-area nations facing growing financial difficulties. Such a step would institutionalize an informal practice under which, for example, the EU recently dispatched experts to Rome to monitor Italian budget progress.

Furthermore, euro-area countries emerging from aid programs would be subject to a new surveillance system under the draft legislation, which needs the approval of EU governments and the European Parliament.

Greater Surveillance

Earlier this month, EU governments gave final approval to legislation making commission-backed sanctions more automatic against euro-area nations that breach deficit and debt limits. This package of six laws is due to enter into force by year-end.

“While it will be a game changer, more should be done specifically for the euro area,” the commission said in presenting today’s proposals on greater surveillance.

Unlike them, the initiative on euro bonds doesn’t involve actual draft legislation. The options paper is meant to kick off a debate with interested parties on the way forward for possible common debt issuance, to which Merkel reiterated her opposition today.

The type of joint bond sales that the euro area could carry out most quickly because no EU treaty change is required would probably offer the fewest benefits to distressed nations, according to the commission. Under this option, euro bonds would partially substitute for national debt issuance and be underpinned by pro-rata guarantees of euro-area nations.

Governments would retain liability for their respective share of euro-bond sales and for their national issuance under this model, which involves debt sales with “several but not joint guarantees,” according to the commission paper.

Partial Substitution

“While this approach would be of more limited use in fostering financial-market efficiency and stability, it would be more easily and more rapidly deployable,” the commission said. “Given the several but not joint guarantees, member states subject to high market risk premia would benefit considerably less from the creditworthiness of low-yield member states” than under the other two possibilities.

The other two options would be the partial substitution of national issuance through euro bonds with joint and several guarantees as well as the full substitution with joint and several guarantees. Both of these probably require an EU treaty change, said the commission.

Barroso is trying to balance opposition to euro bonds by Merkel and support for them in southern nations including Greece and Italy, federalist-leaning Luxembourg and Belgium, and the European Parliament. Barroso has called them “stability bonds.”

--Editors: Jones Hayden, Andrew Clapham

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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