Tightening fiscal integration in the euro zone and surrendering more sovereignty in the name of deeper cooperation between member states may be possible only in the medium term, the EU’s top economic official said on Monday, dampening expectations of a rapid leap forward.
The European Central Bank and some U.S. and European policymakers have called for closer economic integration among the 17 countries that use the euro to underpin the currency, a process that will involve widening the powers of the European Commission in controlling national budgets.
But Economic and Monetary Affairs Commissioner Olli Rehn said it will take time for countries to give up such national autonomy, highlighting the obstacles to advancing rapidly towards such a goal.
“More fiscal integration would likely involve more explicit transfers of sovereignty,” Rehn told the European Parliament in Strasbourg. “This may be possible only in the medium term.”
EU leaders will discuss tighter cooperation in Brussels at the end of June, aiming to underscore their commitment to the euro and persuade investors of the currency’s future.
Any deeper integration could be a step towards the issuance of common euro zone debt, but that is still years away.
Germany, which is the euro zone’s most powerful economy and enjoys the lowest sovereign borrowing costs, would lose most if such bonds were introduced as it would effectively have to underwrite weaker, more risky members of the bloc.
“We have reached a situation where more mutualization of sovereign risk would require more fiscal integration before it could be justified,” Rehn said.
Still, Rehn said that clarifying the steps that would be taken towards integration would rebuild confidence. Many economists and investors feel the euro is a half-finished project because monetary union is not backed by fiscal union.
Under existing rules, countries that miss targets for controlling their budget deficits can be punished. It is down to the European Commission to propose sanctions, first by demanding that countries hand over a deposit of money and later by fining them.
Draft legislation would extend the powers of the EU executive in monitoring countries’ spending by giving the Commission a say in national budgets before they are finalized.
NO STRINGS ATTACHED?
Rehn also called for movement towards a banking union, steps which he said could be taken more quickly.
This would mean strengthening supervision of large lenders in Europe as well as establishing a single bank resolution authority and deposit guarantee scheme.
“Already in the short term, more can be done to strengthen the financial sector in Europe … to establish a financial union to complement the economic and monetary union,” said Rehn.
Rehn also said Spain would not have to meet additional fiscal targets or implement new structural reforms in return for receiving financial aid, after euro zone finance ministers agreed over the weekend to help the country’s banks.
“Policy conditionality will focus on the financial and banking sector,” Rehn told lawmakers. “There will be no new conditions on fiscal policy and structural reforms because these issues are dealt with under the reinforced economic governance and there, the normal policy conditionality applies.”
Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits are ready in about a week.
Rehn also called for the possibility of direct recapitalization of banks by the euro zone’s permanent rescue scheme, the European Stability Mechanism, or ESM.
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