Exclusive: Euro zone mulls cheap loans as incentive for economic reforms -document

Fri Nov 22, 2013 12:46pm EST
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By Luke Baker

BRUSSELS (Reuters) - Euro zone states are considering cheap loans to member governments as an incentive to carry out painful economic reforms, an EU document showed, introducing a discussion on fiscal transfers.

The proposal did not specify how exactly the loans could be financed, mentioning only a European Commission idea from March that it could be either through direct contributions from governments or through designating a new revenue source.

The document, prepared by the chairman of European Union leaders Herman Van Rompuy, will form the basis of discussions between senior euro zone officials at a meeting in Brussels on Wednesday to prepare for next month's European Union summit.

The loans would be part of so-called contractual arrangements, which would be legally binding contracts with economic reform targets and milestones that trigger the payout of tranches of the agreed loan.

The loans would be attractive because they would be offered at interest rates below those in financial markets. In that respect, they would amount to a degree of subsidized lending, ultimately amounting to a mutualising of risk among involved member states and a degree of financial transfer - an idea that Germany has long resisted.

"Loans would imply only limited fiscal transfers across countries," said the nine-page document, obtained by Reuters.

"Indeed, the transfer element would be limited to a lower interest rate than the market rate of most beneficiary member states, capturing the positive externality of the reforms for the EU as a whole," it said.

A mechanism for fiscal transfers would move the euro zone a step closer to a fiscal union, especially if the mechanism of loans for reforms were to form the nucleus of a euro zone budget, so far only cautiously referred to by policymakers as the euro zone's "fiscal capacity".   Continued...

File picture shows European Union member states' flags flying in front of the building of the European Parliament in Strasbourg, April 21, 2004. REUTERS/Vincent Kessler/File