FACTBOX-EU works on reforms in euro zone debt crisis

June 13 Sun Jun 13, 2010 4:57am EDT

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June 13 (Reuters) - The European Union is debating a series of reforms to try to prevent any future euro zone debt crisis. Reforms designed to prevent debt building up, increase macroeconomic cooperation and set up a permanent aid mechanism for countries in fiscal trouble are being worked out by a task force led by EU President Herman Van Rompuy.

The task force, which includes the bloc's finance ministers, the European Central Bank and the European Commission, is to propose changes before an EU summit in October.

The 27-country EU has also pledged to pioneer reform of the financial sector following the global economic crisis, but large EU member states disagree on how exactly this should be done and discord has slowed down progress.

Following are the main reforms and some sticking points:

STRONGER BUDGET DISCIPLINE RULES

* All EU countries should strive to achieve a budget close to balance by cutting their deficits by 0.5 percent of GDP annually. Penalties for exceeding the deficit ceiling of 3 percent of GDP should be automatic or semi-automatic.

Countries failing to move towards the balanced budget could be forced to make financial deposits with the EU executive, the European Commission. Rule breakers could also be stripped of EU aid funds. Germany wants all countries to incorporate tough budget laws into their national legislation.

* There should be more focus on debt. Since the current rule that countries should have a debt-to-GDP ratio below 60 percent is not respected, disciplinary steps should be taken against governments that do not cut their debt levels fast enough.

ECONOMIC GOVERNANCE

* Governments should cooperate more closely on synchronising their budget policies, reducing differences in competitiveness of their economies and aiding countries in trouble.

* EU countries would in the first six months of each year send Brussels their rough budget plans for the following year so that the Commission and all finance ministers can review them.

* Surveillance of the macroeconomic imbalances should be beefed up. The Commission would assess the risk of all possible forms of macroeconomic imbalances that jeopardise the proper functioning of the euro area, and suggest what needs to be done.

Finance ministers would then ask the country to take the necessary action to remedy it. The Commission could also issue warnings to that country.

AID MECHANISM

* A recently approved aid mechanism for Greece worth 110 billion euros ($132.4 billion) and a safety net for other euro zone countries worth 500 billion euros are temporary measures and will expire after three years.

* Proposals being floated include a common bond issued by euro zone countries, possibly overseen by a European Debt Agency or a European Monetary Fund similar to the International Monetary Fund. Germany opposes a common euro zone bond and backs the European Monetary Fund idea.

STICKING POINTS

* France wants regular meetings of euro zone leaders that would function as an economic government for the currency area and be a political counterweight to the European Central Bank.

* Germany shuns the idea of a euro zone government able to make voluntary decisions and wants tough budget discipline rules inscribed into national laws or an amended EU treaty.

* Britain opposes any reforms that would cede more powers to EU institutions. It has ruled out sending its budget plans to Brussels before its national parliament is informed about them.

BANK LEVY

* Most European leaders would like to collect more money from banks but they disagree over whether this should end up in the public purse or in a special fund for future crises.

* The debate has been complicated by proposals from Germany to introduce a tax on financial transactions, which London opposes.

* With a global deal ditched before a meeting of G20 countries this month, Europe is struggling to find a formula that could work across the whole bloc.

TACKLING SPECULATORS

* EU politicians have long blamed "speculators" for making the euro zone debt crisis worse. They believe investors who bet on Greece defaulting on its debt caused panic on markets and forced euro zone countries to build a $1 trillion safety net.

* But tackling the market bettors has been messy, with Germany imposing a unilateral ban on some trading, a move that caused more chaos on markets.

* The European Commission is set to unveil a draft set of rules to control the $600-trillion market in derivatives, which give investors the option to buy anything from currency to gas at a fixed price in the future.

* A row is brewing between Germany and France, who want some trading to be banned, and Britain, which wants looser controls.

EU REGULATORY SUCCESSES

* Hedge funds and private equity are the first parts of financial services to be covered by new post-crisis EU rules that will place them under the watch of a new pan-European super watchdog.

* Ratings agencies will also be subject to new controls this year that require them to outline how they take ratings decisions for countries such as Greece.

* Michel Barnier, the EU commissioner in charge of an overhaul of financial services, has said he will do more to break the power of the big three agencies that dominate this market. One of his ideas is to set up a European ratings agency.

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