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TEXT-Fitch: central EMU budget would be significant integration step
Oct 26 - An agreement to set up a eurozone budget, while not a near-term prospect, would be a significant step towards further EMU integration even if its initial resources were small, Fitch Ratings says. Although embryonic, the concept, which was mooted by European Council President Herman Van Rompuy before the October EU Summit, has a well-grounded economic rationale. A central budget would acknowledge that monetary policy may not always enough for the eurozone to cope with asymmetric shocks. It would also be able to focus resources towards a country experiencing a shock. For example, it could temporarily fund active labour market policies to prevent unnecessary destruction of human capital. And it would help prevent excessively pro-cyclical fiscal policy in individual countries, and in the eurozone as a whole. In light of the very full reform agenda that eurozone authorities are already grappling with, a central budget will probably be less of a priority compared with other initiatives such as banking union. As with the raft of existing measures aimed at deepening economic and fiscal integration in the eurozone, political and implementation challenges would be large, although the idea does appear to have a degree of political support. In their statement following the summit on 18-19 October, EU leaders agreed to explore "further mechanisms" for an integrated budgetary framework for the euro area, "including an appropriate fiscal capacity." Our baseline expectation is that further institutional reforms of this type will allow the monetary union to survive intact, but as we highlighted immediately after the October summit there are risks of the reform process losing momentum. If the central budget proposal is to survive, creditor countries will need assurances that its "limited fiscal solidarity exercised over economic cycles" will not amount to perpetual transfers from core to periphery. Any transfers would have to be conditional on the recipient's full adherence to EMU's fiscal governance framework. Indeed, Van Rompuy's proposal explicitly stated: "Elements of fiscal risk sharing can and should be structured in such a way that they do not lead to permanent transfers across countries or undermine the incentive to address structural weaknesses." That suggests that creditor countries would only back the proposal if they thought economic adjustment processes would work, and that transfers would ultimately cease. Nevertheless, there is a precedent in the EU's budget (which amounts to roughly 1% of total GDP), which is not spent evenly across the union and therefore represents a transfer between states and regions. Projects in EFSF programme countries are receiving a greater proportion of their financing from the EU's development funds. Van Rompuy's remarks came in his Interim Report on progress towards a "genuine Economic and Monetary Union", published on 12 October.
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