22 November 2013

Reuters: Eurozone mulls cheap loans as incentive for economic reforms - document

Eurozone states are considering cheap loans to member governments as an incentive to carry out painful economic reforms, an EU document showed, introducing a discussion on fiscal transfers.

The document, prepared by the chairman of European Union leaders Herman Van Rompuy, will form the basis of discussions between senior eurozone officials at a meeting in Brussels on Wednesday to prepare for next month's European Union summit.

The loans would be part of so-called contractual arrangements, which would be legally binding contracts with economic reform targets and milestones that trigger the payout of tranches of the agreed loan. The loans would be attractive because they would be offered at interest rates below those in financial markets. In that respect, they would amount to a degree of subsidised lending, ultimately amounting to a mutualising of risk among involved member states and a degree of financial transfer - an idea that Germany has long resisted.

"Loans would imply only limited fiscal transfers across countries", said the nine-page document, obtained by Reuters. "Indeed, the transfer element would be limited to a lower interest rate than the market rate of most beneficiary Member States, capturing the positive externality of the reforms for the EU as a whole", it said.

A mechanism for fiscal transfers would move the eurozone a step closer to a fiscal union, especially if the mechanism of loans for reforms were to form the nucleus of a eurozone budget, so far only cautiously referred to by policymakers as the eurozone's "fiscal capacity". "The forms of support and means available could grow over time and come to constitute a financing capacity for the euro area," the document said.

However, chairman of eurozone finance ministers Jeroen Dijsselbloem, referring to such a broad idea in an interview with French daily Les Echos on Friday, was critical. "Modernising the economy must be motivated from inside and I don't believe for a second that big countries are going to undertake reforms in exchange for cheap loans or other such things, as Herman Van Rompuy is considering", he told Les Echos. "But this subject needs to be discussed by heads of state. These proposals look a bit like those on eurobonds in my view,""Dijsselbloem said.

"I'm not in favour because they would remove any incentive to run a healthy budget policy. Only differentials in the interest rates charged by the markets depending on the policies implemented can give the right signal. Let's not repeat the same mistakes", he said.

To ensure a government delivers on the goals agreed in the contract, the loan could be paid out in tranches and the interest rate subsidy could be paid out only at the end of an agreed implementation phase. If the contract is breached, the eurozone could suspend payouts or even ask for its money back.

To qualify, countries would have to draw up legally binding plans for reforms that would then be approved by other eurozone states. The conditionality would come on top of other macro-economic programmes such as the Stability and Growth Pact and the eurozone's new budgetary oversight powers.

"Financial support should be conceived as an incentive or as general support to the overall economy rather than as a compensation for the specific cost of reforms as such, as well as a broader signal of European support to the economic reform agenda of each Member State", the document said.

Full article

Document

Open Europe lists the key points of the plans

© Reuters