PARIS (MNI) – Germany next month will propose a permanent crisis
resolution mechanism for the Eurozone that establishes rules for
emergency funding to enable fiscally troubled member states to avoid
default, the Financial Times reported Friday.

Because the plan would involve changes to the European Union’s
Lisbon Treaty, it will likely meet strong resistance from a number of EU
countries, especially the UK, which is not a member of the Eurozone, the
FT wrote.

The mechanism Germany intends to propose would replace the E440
billion European Financial Stability Facility, due to expire in June
2013.

According to the newspaper, some countries object to the German
plan because they fear it would create a whole new level of moral hazard
if sovereign borrowers and lenders knew they had a safety net in place
to avoid outright default.

But Germany’s counter-argument is that it would actually reduce
moral hazard, because private lenders would be required to take some
kind of “haircut” in the event the debt of a sovereign EMU state had to
be rescheduled. This would also encourage wider spreads on the debt of
fiscally wayward governments, the paper noted.

A senior German official quoted by the FT said Germany would make
its proposal in November, when the second phase of a task force headed
by EU Council President Herman Van Rompuy begins.

A first phase of measures, expected to be approved by EU leaders in
mid-October, include closer budgetary cooperation among EU members and
quasi-automatic penalties for failure to adhere to the Union’s fiscal
rules.

The German government wants to impose stiffer penalties, including
the suspension of voting rights for member states that persistently
violate EU fiscal rules. Such a change would require a treaty change.

Establishment of a permanent resolution mechanism would also need
an amendment to the treaty, because the current treaty forbids the EU
from assuming the liabilities of any member state.

Any attempt change the treaty would be a long and difficult
political challenge, and would face stiff opposition from several EU
members.

— Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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