BRUSSELS (MNI) – European leaders seeking to agree a vision for
deepening economic integration are set to discuss strengthening their
existing policy coordination through the introduction of binding
contracts with EU authorities and some limited forms of common debt

The ideas are detailed in a discussion paper prepared for an EU
summit next week, prepared by EU Council President Herman Van Rompuy in
cooperation with the European Commission, European Central Bank and
Eurozone finance ministers.

Expanding upon a rough sketch presented in October, the paper calls
for the 17 countries that share the euro currency to shore up adherence
to their system of economic policy coordination by introducing
“contractual arrangements” between governments and the EU institutions.

These should be mandatory for all Eurozone countries but only
voluntary for the EU’s other members, the document says.

The paper, which will be the basis for a debate among EU leaders on
December 13-14 also recommends that Eurozone countries start sharing a
common piggybank to help finance structural reforms, and consider a
joint-insurance system to aid countries that experience sudden, deep
economic difficulties.

To enhance this macro-economic insurance system, Eurozone
governments could allow it to finance itself with bonds, an idea that
could allow them to issue some common debt in a way that would not
involve rich governments overtly subsidizing poorer ones.

EU leaders discussing the ideas at the summit will also be
attempting to overcome profound differences over their plan to make the
European Central Bank the ultimate supervisory authority for banks in
the Eurozone, the first step of a bolder project to create a united
banking system.

Such an “integrated financial framework” requires at least a common
approach to deal with failing banks, but ultimately, once a common
supervisory system is in place, should also be dealt with by an EU
institution, a European Resolution Fund, the paper argues.

The cost for cleaning up bank failures should be borne by banks’
shareholders and creditors, with the European Resolution Fund financed
through an industry levy with back up financing available from the
European Stability Mechanism, the Eurozone’s sovereign bailout fund.

Van Rompuy and the report’s other authors had previously also
argued for the creation of a common deposit guarantee scheme, to truly
sever the financial dependency between banks and their national
governments, but have watered down their recommendation in this paper,
calling simply for a harmonized system of deposit guarantees.

Governments loathe to put their taxpayers at risk for failed banks
in other countries ruled out such a move when it was floated in October.

“The idea of deposit guarantees was killed in the October European
Council,” said Finland’s EU minister Alexander Stubb in a message on
Twitter Thursday.

The report also recommends that the details governing the European
Stability Mechanism’s capacity to recapitalize troubled banks directly
be worked out by the end of March next year, even though the ECB is
unlikely to be in a position to fully exercise direct supervision by

–Brussels Newsroom, +324-952-28374;
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