FRANKFURT (MNI) – A fiscal union for the Eurozone could prevent
“unsustainable” budget policies and control debt issuance, European
Central Bank Executive Board member Benoit Coeure said on Friday.

“With these powers in place, a path towards common debt issuance
would also be possible, but only at the end of the process,” he said in
a speech for delivery at a conference in Mexico City.

Coeure’s comments echo those of fellow Board member Joerg Asmussen,
who said Tuesday that increased sovereignty sharing “would imply that a
euro area authority would have competence to limit countries’ ability to
issue debt.”

Coeure noted the significant steps taken at the EU Summit in late
June, including the possibility for direct recapitalization of banks via
the future European Stability Mechanism, which is “crucial” to break the
feedback loop between banks and their national governments, which “is at
the heart of the crisis.”

“This would move the euro area closer to the type of financial
union we see in federations like the U.S. or Switzerland, where banking
sector problems are dealt with at the federal level and have no
implications on the finances of the federated units,” the board member
said. “Of course, this must be accompanied by appropriate incentives for
banks to limit moral hazard.”

The central banker also lauded the commitment of leaders to
establish a single bank supervisor, adding that “the ECB stands ready to
play a role, provided that there is no contamination between monetary
policy and financial stability.”

While acknowledging that fiscal consolidation often leads to
short-term pain, Coeure nevertheless stressed how it was essential for
sustainable growth.

“I do not deny that there are negative demand effects in the short
term,” he said. “But for the longer term, sound fiscal policies are
essential to lower borrowing costs and encourage investment. Moreover,
in those countries experiencing severe sovereign debt tensions, fiscal
consolidation is unavoidable to maintain market access.”

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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