MercoPress. South Atlantic News Agency

Berlin conditions Euro area bonds to an EU fiscal authority to control budgets

Former ECB chief Jean-Claude Trichet idea of a European Finance ministry to impose fiscal discipline is reborn

When former European Central Bank Jean-Claude Trichet called last June for the creation of a European finance ministry with power over national budgets the idea seemed fanciful, a distant dream that would take years or even decades to realize, if it ever came to be.

One year later, with the Euro zone's debt crisis threatening to tear the block apart, Germany is pushing its partners for precisely the kind of giant leap forward in fiscal integration that the now-departed European Central Bank president had in mind.

After falling short with her “fiscal compact” on budget discipline, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage Euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

She is also seeking a coordinated European approach to reforming labour markets, social security systems and tax policies, German officials say.

Until states agree to these steps and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like joint Euro zone bonds or a “banking union” with cross-border deposit guarantees - steps Berlin says could only come in a second wave.

The goal is for EU leaders to agree to develop a road map to “fiscal union” at a June 28-29 EU summit, where top European officials including European Council President Herman Van Rompuy will present a set of initial proposals.

Meanwhile in France the new Socialist government said it is determined to restore its credibility over budget management by meeting public deficit targets, Finance Minister Pierre Moscovici said.

President Francois Hollande has pledged to stick to the previous conservative government's commitment to cut the deficit from an estimated 4.5% of GDP in 2012 to within an EU-imposed limit 3.0% in 2013, even though many economists see that as hard without spending cuts.

“There is a lack of credibility for France about the public deficit,” Moscovici said on LCI television. “We're being watched. I promise you Francois Hollande is fully aware of this, it's something he lives with every day.”

The European Commission had warned on Wednesday that France risked missing its budget goals without fresh efforts.

”What's being asked of us is budgetary credibility. I tell you here again that (the public deficit) will be 4.5% in 2012 and 3.0% in 2013,” Moscovici said.

Despite its bloated debt and deficit levels, France is borrowing at historically low rates. Europe's No. 2 economy has not balanced its budget since 1974.

In Spain, the latest combat zone in Europe's long-running debt wars, urged the Euro zone to set up a new fiscal authority to manage the bloc's finances and send a clear signal to markets that the single currency project is irreversible.

Prime Minister Mariano Rajoy said the authority would also go a long way to alleviating Spain's woes which, along with the prospect of a Greek Euro exit, have threatened to derail the single currency project.

Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain's borrowing costs to record highs and pushed the country closer to seeking an international bailout.

In Ireland voters last Friday agreed to ratify the European Union's deficit-fighting treaty with “yes” votes reaching nearly 60%. Leading Irish opponents of European austerity conceded defeat.

The treaty's approval relieves some pressure on EU financial chiefs as they battle to contain the Euro zone's debt crisis. But critics said the tougher deficit rules would do nothing to stimulate desperately needed growth in bailed-out Ireland, Portugal and Greece nor stop Spain or Italy from requiring aid too.

“The `yes' side has won. The question now is where will the jobs and the stability they have promised come from, against the backdrop of a continuing and deepening capitalist crisis within Europe? Their policies will only make the situation worse,” said Joe Higgins, leader of Ireland's Socialist Party, which opposed the treaty.