–Adds Comments On Germany’s Eurobond Stance, ECB’s Role In Crisis

BRUSSELS (MNI) – The European Commission on Wednesday proposed
legislation that could give Brussels sweeping new powers to vet the
national budgets of Eurozone countries, and it presented a study
outlining options for the 17 countries of the currency bloc to issue
jointly-backed “Eurobonds.”

The new rules, which must be approved by EU governments and the
European Parliament, are the latest in a string of reforms aimed at
toughening economic governance and fiscal discipline in a bid to avoid
future debt crises.

If approved, Commission technocrats will be able to review draft
national budgets and insist on changes before parliaments vote on them.

The EU executive also wants to subject any country that seeks EU
financial assistance to close scrutiny, as it has been doing in Greece,
Portugal, Ireland and even in Italy, which has not sought aid.

Under the Commission’s plans, governments would have to use
‘independent’ data not collected by a government agency when planning
their budgets, and they would be required to enact balanced budget laws.

These new powers, which come only weeks after EU lawmakers agreed
to closer economic surveillance and near automatic sanctions for
rule-breakers, would see euro area governments cede considerable
sovereignty to EU technocrats, but would not require changes to the EU
treaty, the Commission said.

“If we want to preserve democracy also for global order, we need to
complement the democracy of nation states with democracy at the EU
level, otherwise we will hand over real sovereignty to markets and
speculators who are not subject to any kind of scrutiny,” European
Commission President Jose Manuel Barroso said at a press conference
shortly after the Commission formally unveiled its proposals.

The Commission is the only institution in a position to monitor and
enforce economic governance in the euro area Barroso said, defending the
democratic legitimacy of the EU executive branch.

Tougher economic and fiscal discipline in euro area countries, the
Commission argues, is needed before the currency bloc’s 17 members can
consider issuing common debt.

“Without stronger governance in the euro area it will be difficult
if not impossible to sustain a common currency,” Barroso said.

In a study outlining three options, the Commission said Eurozone
governments could consider completely replacing national bond issues
with bonds jointly backed by all the countries in the euro area; a
partial substitution of national bonds by jointly backed bonds; or a
partial substitution of national bonds with bonds only partly backed by
other governments.

The first, most ambitious option, would make euro area countries
liable for each others’ debts and require “significant treaty changes,”
the Commission said. Although this idea will be tough to sell
politically, in the Commission’s analysis it would have the advantage of
creating a huge pool of debt that would rival the United States’
treasury market in size.

At the other extreme, euro area countries could quickly issue
‘Eurobonds,’ also known as ‘stability bonds,’ if they were only partly
backed by guarantees from other governments and there was a cap on the
volume of such bonds that countries could issue.

An intermediate option presented by the Commission is the
so-called, ‘blue bond’ and ‘red bond’ proposal. Under this approach,
which may require some limited treaty changes, national governments
would be able to issue ‘blue’ Eurobonds that enjoy the collective
backing of other euro area member states up to a certain percentage of
their GDP, and thereafter issue ‘red’ bonds for which they were solely
liable.

Barroso denied that the Commission’s paper on stability bonds was
aimed at Germany, Europe’s largest economy, where politicians, including
Chancellor Angela Merkel, have balked at the prospect of their taxpayers
picking up the tab for more profligate countries.

Dismissing suggestions that Germany was adamantly opposed to the
prospect of jointly-backed Eurozone debt issuance under any conditions,
Barroso said he had “absolutely the opposite impression.” The issue for
Germany, he added, was one of timing.

In event, Barroso suggested, governments, including Germany, often
change their minds after a rational debate or when circumstances change.
The Commission’s paper was intended to launch an “informed debate,” and
it would only be after such a debate that the Commission would make any
recommendations about what, if any, type of ‘stability’ bond Eurozone
countries should consider.

On the role of the European Central Bank, which some EU officials
have suggested should be broadened beyond its single mandate for price
stability, the Commission president was careful to show his support for
the bank’s independence. But he also emphasized its duty for maintaining
financial stability.

“The ECB has to act in the framework of the treaties,” said
Barroso, adding that the central bank’s independence was “critical” for
its credibility.

“We are confident that the ECB will take all necessary measures to
guarantee of course, not only price stability, but also financial
stability, as they have been doing,” he said

The ECB has used non-standard measures to ease liquidity
constraints in the European banking system and tensions in sovereign
bond markets. It has justified their use, saying they are needed to
restore the effective transmission of its monetary policy in the face of
the crisis. “We are confident they will keep this policy,” Barroso said.

Governments should not, however, expect the ECB to do their work,
Barroso said, emphasizing that national political leaders must pursue
fiscal and structural reforms.

–Brussels Newsroom, +324-952-28374; pkoh@marketnews.com

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