Deal struck on Eurozone budget rules

A missing piece in the Eurozone’s newly strengthened fiscal defence is poised to fall into place after a compromise was struck between national governments, members of the European Parliament and the European Commission over new budget rules.

At the heart of the agreement is a commitment by the commission, the EU’s executive arm, to set up a high-level working group to study the feasibility of creating a debt redemption fund for Eurozone countries - an idea that some view as a step towards mutually guaranteed Eurozone bonds.

The commission would not be under any obligation to propose such an initiative, which Germany, in particular, staunchly opposes. In return, holdout MEPs will lend their support to new fiscal rules known as the “two-pack”, which give the commission potentially sweeping new powers to review member states’ budgets before they are submitted to their own national parliaments. Brussels would also be permitted to suggest changes.

The two-pack has been touted as the last link in a system of Eurozone defences intended to prevent a recurrence of the debt build-ups that contributed to the current crisis, and have necessitated bailouts for Greece, Ireland and Portugal.

It complements a separate legislative package, known as the six-pack, that is already in place and gives the commission greater authority to sanction member states that flout budget rules, and to monitor their economies.

But, in spite of repeated pleas from Olli Rehn, the economics commissioner, the two-pack has been delayed for months due to a power struggle between the European Parliament and member states that is only tenuously linked to the actual legislation.

MEPs, particularly those from the Alliance of Liberal Democrats, had demanded a commission commitment to support a redemption fund as the price of their support.

With a deal in sight on Monday evening, Rehn said: “We are close to a breakthrough on a future strengthening of the Eurozone’s economic governance.”

A redemption fund would pool the debts from each Eurozone country that exceed 60 per cent of their gross domestic product, and then raise money to pay them down over a set time period.

The commission has previously ruled that creating a redemption fund would require the dramatic step of changing the EU treaties. Under a compromise text negotiated by the parties, the commission will instead issue a formal declaration committing itself to a working group to review the redemption fund.

“The commission will establish an expert group to deepen the analysis on the possible merits, risks, requirements and obstacles of partial substitution of national issuance of debt through joint issuance in the form of a redemption fund and eurobills,” says a draft seen by the Financial Times.

“The group will be tasked to thoroughly assess, what could be their features in terms of legal provisions, financial architecture and the necessary complementary economic and budgetary framework.”

The findings are to be submitted no later than March 2014 - but are not expected to come before September elections in Germany, where the idea is highly controversial.

— Financial Times