February 22, 2016 / 6:13 PM / in 2 years

Italy wants EU bonds to fund refugee response

ROME (Reuters) - A common European Union policy to manage external borders and cope with the refugee crisis should be funded with common resources, including through the issuance of EU bonds, Italy said on Monday.

Migrants are rescued by the Italian Navy in the Mediterranean Sea, January 28, 2016. REUTERS/Italian Navy

In a report prepared by its finance ministry, Italy also urged changes to euro zone fiscal rules in the light of weak growth and inflation.

The country’s prime minister, Matteo Renzi, is locked in a dispute with the European Commission over his 2016 budget and has demanded flexibility to allow him to cut taxes and spend more, but he is unlikely to obtain what he has asked for within existing rules.

“In the presence of protracted modest growth rates and exceptionally low inflation even the extraordinary measures put in place by the European Central Bank are proving insufficient,” said the paper published on the government’s website.

“A framework designed for normal conditions of growth and inflation has proved incapable of tackling effectively the impact of very low nominal growth on potential growth and on debt dynamics,” it said.

Italian gross domestic product grew less than expected in the third and fourth quarters of 2015, leaving prospects for this year looking much weaker than the government’s official forecast of 1.6 percent growth.

Italy’s public debt of around 133 percent of gross domestic product is the highest in the euro zone after Greece‘s, and Renzi has argued that tough EU rules on debt reduction, known as the “fiscal compact,” risk being counter-productive.

EU BONDS

The 9-page paper, titled “A Shared European Policy Strategy for Growth, Jobs, and Stability”, also called for a common European response to the refugee crisis, the worst wave of migrants seen in the continent since World War Two.

Most migrants come to Greece and Italy through Turkey and Libya fleeing wars and poverty in the Middle East, Africa and Asia. EU plans for sharing the costs of the crisis have so far produced little result.

“A long-term refugee policy is required as the phenomenon is expected to last,” the Italian paper said.

Plans for a common management of EU’s external borders “would justify the recourse to a mutualized funding mechanism which could entail issuance of common bonds,” the paper said.

The Commission has used the EU budget as collateral to issue bonds to provide emergency money to EU countries in financial stress, but plans to step up the issuance of bonds have repeatedly failed, as richer countries such as Germany fear an increase of their funding costs. The Italian paper also called for a common euro zone unemployment insurance scheme and backed the idea of a finance minister for the whole euro zone and a common treasury, ideas voiced in the past by the European Central Bank, and the governments of Germany and France.

The European Stability Mechanism (ESM), which is equipped with capital of 700 billion euros, should also become a European Monetary Fund to “fully exploit the benefits of this pool of resources,” the paper said.

Reporting By Gavin Jones in Rome and Francesco Guarascio in Brussels; additional reporting by Jan Strupczewski in Brussels and Balazs Koranyi in Frankfurt; editing by Steve Scherer

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