EU tiptoes around the idea of single euro zone budget

Reuters: Euro zone countries have been married in a single currency union for well over decade, but only now are they considering the tricky issue of whether they should share a budget.

At a two-day summit that ended on Friday, EU leaders discussed the idea in more detail, with Herman Van Rompuy, the president of the European Council and chairman of the summit, saying it was an anomaly for a currency union not to have a common budget or, as he put it, a common “fiscal capacity”.

But while conceptually it may make sense, there are vast differences among the 17 euro zone countries over how the budget should be financed, what it would be for, how it would be managed, and whether it will help everyone or just some.

Advocates believe a shared budget could help avoid a repeat of the crisis riddling the region for the past three years, by offering a response to fiscal problems in individual countries before they infect the entire system.

That’s because, unlike the euro zone’s permanent crisis tool, the European Stability Mechanism, countries would not have to wait until they risk being shut out of the financial markets before being able to ask the fund for assistance.

Linking contributions to countries’ position in the economic cycle would force them to be more thrifty, Van Rompuy argued in a set of background notes prepared ahead the summit.

“Contributions in good times would reduce the country budget balance, leading countries to be less inclined to adopt pro-cyclical fiscal policy (e.g. additional expenditure or tax cuts...),” he explained in a document sent to EU capitals.

On the other side of the coin, “transfers from the fiscal capacity to the country budget would provide more room for countercyclical fiscal policy in bad times,” he said -- suggesting the budget would be good both for those who will tend to pay in and those who will tend to receive.

But the idea also carries risks. Some fear it will formalise a two-speed Europe, with members of the single currency bloc forging ahead in an ever-more integrated group while the remainder of the ten countries in the EU are left behind.

“We should not fool ourselves. If we are letting two speeds come about then it is not in our interest,” said Austrian Chancellor Werner Faymann, whose country is in the euro.

“When we’re talking about a budget for more competitiveness, for better education, for better skilled labour training ... I have just as much interest that it would function in Poland as in other countries,” Faymann told Austria’s ORF radio, adding that he was opposed to the idea.

Britain’s support for the proposal is regarded by many as proof that it will put more distance between euro and non-euro nations. One diplomat described the fund as the possible means for a “velvet divorce” between Britain and the EU.

Finland’s Europe minister, Alexander Stubb, told Reuters on Thursday there was clearly something to be questioned about any proposal that both Britain and France supported.

There are also concerns that the process of fleshing out the idea will distract attention from more immediate crisis response measures, and complicate a looming tussle over the European Union’s long term spending plans.

“We have a lot of questions about separate budgets because there is already an EU budget,” Dutch Prime Minister Mark Rutte told reporters in Brussels.

Van Rompuy said EU leaders had asked him to add more detail to the proposal in time for further talks at another meeting in December. That could make a deal even harder to reach at a special EU summit in November to agree the EU budget for 2014-2010, worth about 1 trillion euros.

While fundamental questions remain over the idea of a separate euro zone fund - not least its overall size - there is plenty of scope for competing interpretations by EU capitals.

Some have suggested it could be financed by a payment of 0.2-0.5 percent of GDP a year, others have said it would only need to have a lump sum of 50 billion euros to be effective. Others question whether it would be annually financed.

As one EU diplomat put it: “We know it’s got fur, and we know it’s got a wet nose, but at the moment nobody has any idea what kind of beast this is.”