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Euro Watch

Plans to Ease Euro Crisis Are Ambitious but Long-Term

LONDON — No one could accuse the architects of a new grand plan for the euro zone of a lack of ambition. They have proposed that the currency union have its own finance ministry, and that member states cede control of their budgets to some central authority and ultimately share debt.

The catch: None of this will happen for years, if it happens at all.

Although Spain’s lofty borrowing costs look sustainable only for a matter of months, and Italy’s may follow suit, a document prepared in advance of a crucial two-day summit meeting of European Union leaders focuses obstinately on the medium and long term.

Even a euro zone banking union, which is seen as the most likely agreement to come out of the summit meeting in Brussels that begins Thursday, could not come into operation before 2013.

By the standards of European integration, which is often couched in the metaphor of a continuing journey, even that is the equivalent of dizzying ride on a high-speed train.

Yet the financial markets move faster.

“If there is nothing else from the summit, the pressure will be immense,” said Christel Aranda-Hassel, senior economist at Credit Suisse in London. “Spanish and Italian debt levels are getting into unsustainable levels.”

So what is the thinking behind the document, which comes at what José Manuel Barroso, president of the European Commission, said Tuesday was “a defining moment for European integration”?

Mr. Barroso drafted the paper along with the president of the European Council, Herman Van Rompuy; the president of the European Central Bank, Mario Draghi; and the head of the group of euro zone finance ministers, Jean-Claude Juncker.

Their work attempts to reconcile the evident need for further mutualization of debt by euro zone member states — as illustrated by the continuing debt crisis — with Germany’s reluctance to give a blank check to weaker euro zone economies.

Germany has not ruled out the issuance of so-called euro bonds, which would be backed by the euro zone as a whole, not its individual member states, thereby presumably making the bonds more attractive to investors. But Germany insists that if it is to share risk with other nations, their governments should cede more control over their spending and borrowing.

This is highly controversial in a number of euro zone countries, most notably France, where preserving national sovereignty is a central concern.

So the architects of the report have skipped neatly around this central conflict. In effect, the four authors suggest that the more euro zone nations integrate, the more debt mutualization there can be. They leave open the question of how much integration there should be.

“The process towards the issuance of common debt should be criteria-based and phased, whereby progress in the pooling of decisions on budgets would be accompanied with commensurate steps towards the pooling of risks,” the document says.

According to this blueprint, fiscal union could be extremely ambitious. One scenario foresees that national governments would have to agree on upper limits to their spending, in order to keep their budgets in balance, and on keeping their debt below certain levels — and would have to then seek approval from other euro zone states if they wanted to exceed those limits.

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Germany’s chancellor, Angela Merkel, has asserted that big changes like issuing common debt cannot be made until countries agree on a broader revamp of the political architecture of the euro zone.Credit...Markus Schreiber/Associated Press

“Under these rules, the issuance of government debt beyond the level agreed in common would have to be justified and receive prior approval,” the document says. “Subsequently, the euro area level would be in a position to require changes to budgetary envelopes if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness.”

The plan includes the possibility of the creation of a new “treasury office” — in effective, a finance ministry for the euro zone.

The quid pro quo could be euro bonds. The document says only that “several options for partial common debt issuance have been proposed, such as the pooling of some short-term funding instruments on a limited and conditional basis, or the gradual roll-over into a redemption fund.”

It is a trade-off that Germany — without which no solution for the crisis is possible — ought to be able to accept. On Monday the German chancellor, Angela Merkel, referred to such an equation — – albeit in a more negative formulation.

“I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures,” she said.

While sketching out their long-term vision, the four senior officials hope to achieve a concrete step at the two-day summit meeting: agreement on a banking union.

Although there is more consensus on this idea, it is still not straightforward. For one thing, the banking union will initially be proposed for all 27 E.U. nations — not just the 17 in the euro zone. But Britain has already said it will not take part, so London is expected to be offered specific exemptions. Alternatively, a group of E.U. member states might agree to go ahead without Britain.

Many other details remain vague.

“A European deposit insurance scheme could introduce a European dimension to national deposit guarantee schemes for banks overseen by the European supervision,” the paper says, for example.

It adds that the euro zone’s permanent bailout fund, the European Stability Mechanism “could act as the fiscal backstop to the resolution and deposit guarantee authority.”

At the summit meeting, there will also be a strong emphasis on stimulating economic growth. At a summit meeting last week, the leaders of Germany, Italy, Spain and France drafted a proposal for €130 billion, or $162 billion, in economic stimulus. The leaders meeting in Brussels this week will struggle to put together the funding for such a plan, although much of the money is supposed to come from existing, but unspent, E.U. subsidies.

Even if there is agreement on the stimulus program and banking union, there is likely to be only small steps forward in realizing a grand plan for further integration — an ambitious strategy that would do nothing to alleviate the immediate problems of Spain and Italy.

Prime Minister Mariano Rajoy of Spain and Mario Monti, the Italian prime minister, are likely to press for urgent action to lower their governments’ borrowing costs. Madrid, at least, might be forced to seek a full bailout later this year if it must continue to borrow at lofty rates. The Spanish Treasury auctioned €3.1 billion of debt on Tuesday, with the interest rate on 3-month bills at 2.36 percent, compared with 0.85 percent in the last such auction on May 22. The rate on 6-month bills was 3.24 percent, up from 1.7 percent in May.

Mr. Monti has already proposed a mechanism to reduce the difference in borrowing costs among euro zone countries by using funds from the European Stability Mechanism and the European Central Bank.

Also on the agenda will be the €100 billion bailout Spain is seeking for its stricken banks. Financial markets have reacted negatively to the bailout because it would add to Madrid’s debt burden. So Spanish officials will press for this funding to be paid directly from the E.S.M. to the financial institutions, rather than funneled through Madrid. This would require agreement on a change in the rules governing the bailout fund.

The markets have low expectations for the meeting in Brussels.

“From the way the markets are trading, they have internalized the view that very little is coming out of this summit,” said Ms. Aranda-Hassel of Credit Suisse. Referring to the grand plan, she added, “At the moment this type of document would be in line with market expectations.”

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