Tighter oversight of euro zone fiscal policy can be achieved through minor, rapid adjustments to the EU treaty, European Council President Herman Van Rompuy told EU leaders in an interim report to be discussed at a summit on December 8-9.
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The aim would be to achieve a "new fiscal compact" that ties euro zone member states more strictly into budget deficit and debt rules, a step that may provide the European Central Bank with room to step up its purchasing of sovereign bonds.
ECB President Mario Draghi used the phrase "new fiscal compact" when he addressed the European Parliament last week, in a comment that suggested the bank would be ready to use more firepower to resolve the debt crisis if the euro zone moved decisively towards a more complete economic union.
"Moving the euro area towards a true economic union requires additional steps in terms of integration, towards a 'new fiscal compact'," says the interim report, dated December 6 and obtained by Reuters.
"To restore market confidence in the euro area, and to ensure the political sustainability of solidarity mechanisms, it is crucial to enhance the credibility of our budgetary rules (deficit and debt levels) and to ensure full compliance."
In the report, compiled after a week of intense consultation with all EU leaders, Van Rompuy also suggests that the euro zone's permanent bailout fund, the European Stability Mechanism, could be given a banking license, which would potentially allow it access to vast ECB liquidity.
"Introducing the possibility for the ESM to directly recapitalize banking institutions and to have itself the necessary features of a credit institution," the report lists as one of four proposed changes to the fund.
Other suggestions are that the ESM's decision-making procedures be brought more directly into line with IMF practices and that the current 500 billion euro ceiling of the ESM's capacity be reviewed.
Rapid adjustments to the ESM, which has not yet been ratified by all euro zone members, "is key to restore market confidence in sovereign debt markets" the report says.
Van Rompuy will chair the two-day summit, which begins with a dinner on Thursday evening, and try to forge a consensus among EU leaders on treaty change so that the euro zone can move more rapidly introduce stricter budget rules.
The interim report, titled "Towards a stronger economic union" was commissioned by EU leaders after a summit on October 26-27, with Van Rompuy asked to explore ways of making euro zone economic union commensurate with monetary union.
FAST-TRACK TREATY CHANGE
The report said tighter deficit and debt rules could be enshrined in law through changes to protocol 12 of the EU treaty, which can be done quickly and would not require ratification by parliaments in most member states.
It would also not require anything more than "consultation" with the European Parliament and the European Central Bank, meaning it could be brought about much more quickly.
However, the interim report says it may also be necessary to revise secondary legislation, such as the EU's stability and growth pact, and that deeper adjustments involving amendments to article 48 of the treaty may also be necessary.
The main aim, however, would be to ensure that euro zone member states keep their budget deficits below three percent of GDP, their debts below 60 percent of GDP and that they introduce into national legislation a "golden rule" that aims for a balanced budget in the medium-term.
According to Van Rompuy's consultations with lawyers and EU leaders, such measures can be brought about by overhauling one key element of the EU treaty, called protocol 12.
"This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes."
The document also keeps alive the possibility of jointly issued euro zone bonds, which Germany opposes, and suggests that it should be possible for euro zone countries to make bilateral loans to the IMF to bolster its resources, possibly for lending back to needy euro zone states.
Under the heading of "economic union," the report says two steps should be considered for closer convergence and budgetary discipline, including: "Opening up the possibility, in a longer term perspective, of moving towards common debt issuance in a staged and criteria-based process, for example starting with the pooling of some funding instruments."
On the IMF, the report concludes: "Finally, there is a need to ensure that the IMF has sufficient resources to deal with the crisis through the provision of additional means, as was done in 2009, in particular through bilateral loans."