Europe considers euro zone budget, pooling borrowing

Fri Oct 12, 2012 7:59am EDT
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By Luke Baker and John O'Donnell

BRUSSELS (Reuters) - Euro zone countries should consider clubbing together to borrow as well as paying into a central budget that could be used to help struggling countries, according to a report prepared by senior European officials ahead of a meeting of leaders.

The interim report, prepared by Herman Van Rompuy, who as president of the European Council will chair a summit meeting next week, charts a path towards closer fiscal integration among the 17 countries using the euro as they struggle to contain an economic crisis.

In the interim paper obtained by Reuters on Friday, officials write of the need to explore a central budget for countries in the euro zone.

Van Rompuy's thinking - firmly backed by Germany - is that some form of "fiscal capacity" among the euro-area countries will allow them to iron out labor market and other socio-economic imbalances that build up in the bloc.

The fund could be used to help a country such as Spain, which has unemployment of 25 percent and is struggling to reinvigorate growth. In exchange for budget rigor, the pan-euro zone fund could provide targeted assistance.

"One of the functions of such a new fiscal capacity would be to facilitate adjustments to country-specific shocks by providing for some degree of absorption at the central level," officials wrote.

The 27 countries in the European Union currently finance a budget which amounts to around 130 billion euros a year - 1 percent of EU output - and which is used for spending on agriculture, science, infrastructure and other areas.

But there is no equivalent budget among the 17 countries that share the euro, a shortcoming that many economists believe has undermined the stability of the currency project.   Continued...