Europe Leaders to Debate Joint Finance Ministry

| November 5, 2012 | 0 Comments

LONDON — Details of a plan for greater fiscal unity in the euro zone, including the creation of a sort of finance ministry for the currency bloc, began to emerge Tuesday ahead of a crucial meeting of European Union leaders eager to find a lasting solution to the region’s debt crisis.

The two-day summit of E.U. leaders, which begins Thursday, had raised some hopes of a breakthrough in the two-year-old debt crisis that has escalated to threaten Spain and Italy, both of which face borrowing costs many believe to be unsustainable in the medium term. An auction Tuesday of Spanish short-term debt confirmed the trend, with the issue selling out amid strong demand but at two to three times the cost of earlier auctions.

But expectations for a short-term win have been lowered by Germany’s chancellor, Angela Merkel, who has asserted that big changes such as issuing common debt will have to wait until countries that use the single currency have agreed to a broader revamp of the political architecture of the euro zone. Those changes could include surrendering more power over their budgets to European authorities in Brussels.

The summit, which will be followed by a separate meeting of euro zone leaders on Friday, is expected to focus on agreeing on the elements of a banking union, which is seen as a concrete step even though it would not come into operation until 2013 at the earliest. Those elements would include a system to wind up insolvent banks, a central deposit guarantee fund, and a bigger supervisory role for the European Central Bank, among other measures.

The leaders will discuss a paper on the future of the euro zone that keeps open the possibility of issuing common debt so long as it is a gradual process accompanied by robust fiscal discipline.

The process towards the issuance of common debt, the document says, “would be accompanied with commensurate steps towards the pooling of risks.”

Under one scenario, national governments would have to agree on upper limits on their spending, in order to balance budgets, and on debt levels – and would then have to seek prior approval for exceeding those limits.

“Under these rules, the issuance of government debt beyond the level agreed in common would have to be justified and receive prior approval,” the document says. “Subsequently, the euro area level would be in a position to require changes to budgetary envelopes if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness.”

The document, which sketches the path to a banking union, also discusses the possibility of the ultimate creation of a new “treasury office,” effectively a finance ministry for the euro zone.

The proposals will be outlined in a paper written by the president of the European Commission, José Manuel Barroso; the president of the European Council, Herman Van Rompuy; the president of the European Central Bank, Mario Draghi, and the head of the euro zone finance ministers, Jean-Claude Juncker.

Spain, along with Italy, is likely to press at the summit for more urgent action to lower borrowing costs, which are close to levels that might, if sustained, force the government in Madrid to seek a full bailout later in the year.

Italy, whose borrowing costs have also risen on fears its economy could be the next under attack, has already proposed measures to reduce the difference in borrowing costs between euro zone countries.

But Germany is determined that it should not finance a country that indulged in excessive spending, and the scale of the changes wanted by the government in Berlin has been made clear by the country’s finance minister, Wolfgang Schäuble.

“In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing,” Mr. Schäuble told the German magazine Der Speigel over the weekend. He added that such changes might also necessitate a referendum in Germany.

But a big shift of power to Brussels would prove highly controversial for many countries inside the euro zone, none less than France, which fiercely defends its national sovereignty.

The European Commission, the executive agency of the European Union, is already expecting to gain powers that would permit it to question a country’s budget if public finances deteriorate.

Plans for a banking union will initially be proposed for all 27 E.U. nations, although Britain has said it will not take part. The British government is expected to be offered specific exemptions. Alternatively, a group of other countries might agree to go ahead with the plans without it.

Some of the details of the bank union plan remain vague, according to the draft document to be discussed at the summit. “A European deposit insurance scheme could introduce a European dimension to national deposit guarantee schemes for banks overseen by the European supervision,” it says, for example.

As the diplomatic pace intensifies ahead of the summit, France’s finance minister, Pierre Moscovici, said he would meet his German, Italian and Spanish counterparts in Paris on Tuesday. The leaders of the four nations met last Friday in Rome but without any significant breakthrough over how to end the most pressing problem: the rise in Spanish and Italian borrowing costs.

In the meantime, the backdrop to the upcoming summit has been worsening steadily. Spain filed a formal application Monday for up to 100 billion euros, or $125 billion, in aid for its banks, whose balance sheets have been wrecked by a real estate crash. The tiny island nation of Cyprus also said Monday it would need assistance. The sums required for Cyprus will be much lower, but the request has some symbolic significance as the country is about to assume the rotating presidency of the European Union on July 1.

European stocks were down slightly at midday, giving up gains from early morning after falling sharply on Monday. The Euro Stoxx 50, a measure of European blue-chips, was down 0.06 percent. European benchmark indexes were also down slightly.

The euro was at $1.2505, up from $1.2500 late Monday in New York.

Asian stocks were mixed, with the Nikkei 225-share index down 0.81 percent and the Hang Seng in Hong Kong up 0.45 percent.

The Spanish Treasury auctioned 3.1 billion euros of debt Tuesday, with the interest rate on 3-month bills was 2.36 percent, compared with 0.85 percent in the last such auction on May 22. The rate on the 6-month bills was 3.24 percent, up from 1.7 percent in May.

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