Brussels is to propose a €30 billion loan plan for countries hit by economic shocks, as it responds to French calls for a euro zone crisis-fighting budget.
The European Investment Stabilisation Function is far less ambitious than ideas put forward by French president Emmanuel Macron, who last year called for a fund amounting to several percentage points of euro zone gross domestic product.
But the European Commission will argue that its plan to be presented on Thursday is a "first step", saying differences among euro zone governments and EU budgetary restraints prevent more ambitious proposals at this stage.
The commission's plans, seen by the Financial Times, would allow it to borrow on capital markets to lend to countries facing one-off problems such as a natural disaster or a localised banking crisis. Countries could borrow to invest in infrastructure and other programmes to cushion an economic blow.
Stoke tensions
Interest on loans made to governments would be covered by a share of the profits that national central banks in the euro zone earn from issuing banknotes – a demand that is likely to stoke tensions with fiercely independent institutions such as Germany’s Bundesbank.
Total loans would be limited to €30 billion with no state allowed to receive more than 30 per cent of available lending capacity. The scheme would be open to euro zone countries and aspiring members in the European exchange rate mechanism.
The creation of more joint euro zone spending power is a core strand of a reform plan for the single currency area being pushed by Mr Macron ahead of a summit of EU leaders in June.
Brussels acknowledges that a full-blown euro zone budget would require “strong political will and consensus” that does not yet exist among EU governments.
Resistance
France and southern euro zone countries are facing resistance from northern capitals, which rule out the need for more common spending pots in favour of governments taking greater responsibility for their national spending.
“The recipe for a larger cake is not centralised bailout funds and printing more money, but structural reforms and sound budgets,” Mark Rutte, the Dutch prime minister, said in a speech in Berlin in March.
Mr Rutte is one of the most vocal opponents of a euro zone budget.
Aware of the political tension, Brussels’ proposal aims to strike a balance between objections from north and south.
In a nod to German fears about underwriting poorer states’ spending, the text stresses that the stabilisation mechanism will result in no “permanent transfers” between euro zone countries, while governments will only be eligible for support if they have met core EU budget rules for the preceding two years.
Eligibility would also be linked to rises in a state’s unemployment rate, which must be higher than a 15-year rolling average and 1 per cent higher than in the same quarter the previous year.
Need approval
Brussels’ draft plan allows for future upgrades to the scheme, saying it “should be considered as a first step in the development over time of a fully fledged insurance mechanism to cater for macroeconomic stabilisation”.
The plan would need approval from EU governments and the European Parliament, with the proposal for sharing out central bank profits requiring unanimous agreement from capitals.
The proposal is distinct from the euro zone’s existing bailout fund, the European Stability Mechanism, which has a €500 billion lending capacity and can be tapped by states that have lost the ability to borrow on capital markets.
The commission plan would leave a door open to the ESM playing a role in administering the stabilisation fund. – Copyright The Financial Times Limited 2018
