November 26, 2011Euro Zone Weighs Plan to Speed Fiscal Integration
Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe's leaders race to convince investors they can resolve the region's debt crisis and keep the currency area from fracturing.
Under the proposed plan, national governments would seal bilateral agreements that wouldn't take as long as a cumbersome change to European Union treaties, according to people familiar with the matter. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.
The plan, which hasn't been finalized, would allow the euro zone to announce a speedy change to its governance. European authorities would gain tough new powers to enforce fiscal discipline in the 17 countries that make up the euro zone, the people said. EU treaty changes could then follow at a later stage.
The precedent that euro-zone governments are considering is the Schengen agreement, under which a subset of EU countries scrapped passport controls at their mutual borders. The EU treaty allows countries to engage in "enhanced cooperation" if at least nine countries agree, circumventing the need for a unanimous treaty change among all 27 EU members.
The pact that euro members are considering could be announced before the EU summit on Dec. 9, according to the people familiar with the matter. However, no final decision has been taken, these people say. Nor is it clear that stricter enforcement of budget rules would be enough, at this late stage, to stem the crisis of confidence in the euro zone.
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Some euro-zone officials hope that the announcement of a new fiscal regime would encourage the European Central Bank to step up its intervention in government bond markets, which are suffering from a spreading investor exodus. But it's unclear whether the ECB, which has so far resisted such calls, would acquiesce. Some members of the ECB's governing council worry that deeper intervention by the central bank would amount to a breach of its charter and do irreparable harm to its credibility.
The need for greater budget discipline and enacting growth-friendly structural reforms is only one of investors' concerns about the euro zone. Another big problem is the lack of ECB support for government bond prices, which makes bond markets vulnerable to a vicious circle of investor flight.
While the ECB has so far said that it won't beef up its limited bond buying, a growing number of governments are lobbying it to change its stance. A green light from Berlin for a bigger ECB role is seen by many euro-zone policy makers as a political necessity if the ECB is to act. Although the bank is politically independent, it has also paid close attention to the debate in Germany, where the government has so far rejected a bigger role for the central bank.
A new, binding fiscal regime would not be enough to justify the creation of collective euro-zone bonds, German officials say. But it might be enough to justify ECB action to stabilize bond markets that policy makers view as increasingly dysfunctional, some in Berlin say.
Other German officials remain skeptical about a greater ECB role—including Bundesbank President Jens Weidmann, who sits on the ECB's governing council. Germany's central bankers have been outvoted by the ECB majority before, however, including this August, when Mr. Weidmann opposed the decision to make limited purchases of Italian and Spanish bonds.
German Chancellor Angela Merkel said last week that she wants EU treaty changes to make the bloc's fiscal rules legally enforceable by European authorities, in the same way that EU antitrust rules are.
Changing the EU treaty is complicated. Some of the EU's 27 members are opposed, others would have to hold referendums, and others have their own wishlists of treaty changes—including the U.K., where many Conservative lawmakers would like to take powers back from Brussels to national level.
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