EU Proposes Limiting Defaulting Countries’ Issuance of Debt
June 28th, 2012
The Heads of State and Government of the eurozone will discuss this Thursday and Friday, at the European Summit in Brussels, moving towards greater banking and fiscal integration in the monetary union, which will mean a loss of sovereignty of member states and greater budgetary control by the EU institutions.
The document, prepared by the European Council President, Herman Van Rompuy, President of the European Commission, José Manuel Durao Barroso, Eurogroup’s Jean-Claude Juncker and Mario Draghi of the European Central Bank, proposes the creation of a single banking supervisor and a ‘super ministry’ of Finance which would be able to amend national budgets and to prohibit a member state from issuing more debt if it exceeds the limits established in the Fiscal Pact.
With regards the banking sector, the document proposes that the European Central Bank act as supervisor of all entities, not just the larger ones, allowing it to have the “ultimate responsibility” over the financial sector. “To establish, at a European level, a banking supervisory authority with powers of intervention over all the banks,” says the text.
Also, they believe the creation of a common deposit guarantee fund is necessary in order to “strengthen the credibility” of the sector and protect the deposits of savers. This fund, along with another prepared to liquidate troubled banks, would be controlled by the European banking supervisor. For the eurozone, the European Stability Mechanism (Mede), the permanent rescue fund which is expected to come into force in July, will act ultimately as guarantor of both the depositors, and the money needed to liquidate a troubled bank.
Within the budgetary integration, the proposal drawn up by these four European leaders raises the possibility of giving greater control to either the Eurogroup or to a European finance minister, so that they may impose limits on the annual budgets of a member state or its debt issues. “Under these rules, the issuance of public debt of a country over a commonly agreed level should be justified and approved in common” by all member states.
In the medium term the eurozone “must explore the joint issuance of debt as an element of progress in the fiscal union,” cites the report. This section does not propose a specific option, but cites several alternatives that have already been discussed previously, such as issuing eurobonds or creating a “debt repayment fund” to lump together the debt of all member states that exceed a certain level relative to GDP. This is the first time an official EU document speaks openly on the creation of a European Treasury responsible for managing these options.
The proposal also includes a reorientation of economic policies of member states toward “sustainable growth and job creation” with a greater convergence of these policies among member states.
El Mundo reported that the report recognises that moving towards greater fiscal integration and decision-making at a European level requires “strong mechanisms to legitimise this new capability for joint decision-making.” The decisions made at this summit will be reviewed in the next European Council meetings in October and December in order to move forward with concrete measures, the document indicated.
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