BRUSSELS (MNI) – European Commission Vice-President for Economic
and Monetary Affairs, Olli Rehn, on Tuesday talked up the potential
benefits to EU countries of jointly-issued bonds and threw his support
to a proposal for a European debt redemption fund.

“Joint issuance of member state debt would fundamentally alter the
structure of EU financial markets,” Rehn said at the European
Parliament. “The advantages seem clear,” he said. “Joint bonds would
serve as a driver” of economic integration and could also lead to lower
borrowing costs and greater financial stability for the EU, he said.

Common bonds would, however, “need rock solid rules based on
economic governance” and would “need to go hand-in-hand with
substantially reinforced fiscal surveillance and enhanced policy
coordination,” said Rehn.

“Stability bonds must be very safe and reliable instruments,
otherwise they would lack market acceptance and credibility in all
member states,” he said.

The Commission Vice-President also praised an idea put forward by
the German Council of Economic Experts for a “European Redemption Pact”
in which EU countries without bailout programs would transfer any debt
that exceeds the 60% of GDP limit into a common fund.

Countries participating in the fund would have to make a binding
pledge to redeem their debt over 20-25 years with convincing measures
such as earmarked national tax revenues.

“I find the proposal smart and potentially doable and certainly
worth further discussion,” Rehn said.

The European Commission last year published a discussion paper on
join-debt issuance that outlined three possibilities for so-called
‘Eurobonds’ or ‘stability bonds,’ but it did not study the redemption
pact idea.

Acknowledging the concerns of Eurobond critics, Rehn cautioned that
“we cannot solve a debt crisis by piling up further debt.” The
Commission will on Wednesday “present proposals concerning fiscal
surveillance” for the five countries that it identified last year as
likely to exceed the EU’s 3% fiscal deficit limit.

Under tough new fiscal discipline rules adopted by the EU last
year, the European Commission could subject such countries — in this
case Belgium, Hungary, Poland, Malta, and Cyprus — to intensified
scrutiny and even propose additional measures, and ultimately financial
penalties.

“This year needs to mark a turning point,” said Rehn. “2012 will be
a year when future governments of the euro area will be determined and a
year when our strong monetary union will be completed by an even closer
economic union.”

“This crisis is by no means behind us and the time has come for a
new and deeper economic integration,” he said.

–Brussels bureau: +324-9522-8374; pkoh@marketnews.com

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