* Draft sets out elements of new "fiscal compact"
* Germany immediately rejects key elements
By Luke Baker
BRUSSELS, Dec 8 EU leaders are committed
to a new "fiscal compact" for the euro zone, including much
tighter control of public finances and, in the longer term,
could consider joint debt issuance, an early draft of
conclusions at an EU summit said on Thursday.
Key elements were, however, immediately rejected by Germany.
"The stability and integrity of the Economic and Monetary
Union and of the European Union as a whole require the swift and
vigorous implementation of the measures already agreed as well
as further qualitative moves towards a genuine 'fiscal union' in
the Euro area," said the draft obtained by Reuters.
The draft showed the euro zone agreed to bring forward the
launch of its permanent bailout fund, the European Stability
Mechanism, to July 2012, and give it a banking licence.
The draft also said that both the temporary bailout fund,
the European Financial Stability Facility (EFSF) and the ESM,
could run in parallel for a year from mid-2012.
The maximum lending capacity of the ESM, set at 500 billion
euros, would not be diminished by the amount of money already
spent by the EFSF, as was the initial plan, the draft said.
But Germany opposed proposals such as giving the ESM a
banking licence, issuance of common euro zone debt and allowing
the parallel functioning of the EFSF and ESM, a senior German
A banking licence for the ESM would give the bailout fund
access to European Central Bank liquidity lines, bolstering its
ability to tackle the euro zone debt crisis. The draft
conclusions also said the ESM should have the ability to
directly recapitalise banks.
A euro zone official said earlier on Thursday that would
help governments keep down deficits, which would not be inflated
by the costs of recapitalising banks.
Euro zone leaders agreed earlier this year that the ESM
would have paid-in capital of 80 billion euros and callable
capital of 620 billion euros. They had decided that the paid-in
capital would be provided over five years.
The draft showed that the leaders were now ready to pay up
"During the phasing in of the paid-in capital, we stand
ready to accelerate payments of capital in order to maintain a
minimum 15 percent ratio between paid-in capital and the
outstanding amount of ESM issuance," the draft said.
To reassure investors that they will never again be asked to
take voluntary losses on euro zone bonds, euro zone leaders
declared that the ESM would strictly follow International
Monetary Fund rules on private sector involvement in any
potential debt restructuring.
They also "clearly reaffirm" that the Greek case was unique
The draft also said that voting in the ESM would be changed
to include an emergency procedure, which would replace unanimous
decisions with a qualified majority of 85 percent -- a change
sought by France and Germany but opposed by Finland.
But this would happen only if the European Commission and
the European Central Bank said that "an urgent decision related
to financial assistance is needed to safeguard the financial and
economic stability of the euro area", the draft said.
Finally, euro zone leaders declared in the draft that they
stand ready to provide to the IMF with additional money, with
the amount left blank, in bilateral loans to ensure that the IMF
has adequate resources to deal with the crisis.
"The Euro area is looking forward to parallel contributions
from the international community," the draft said.
A senior euro zone source said earlier the amount from the
euro zone would be 150 billion euros and expectations of
non-euro zone contributions were for around 50 billion.
"We agreed today on a new 'fiscal compact' and on
significantly stronger coordination of economic policies in
areas of common interest," the draft declaration said.
The draft said this would entail establishing a new fiscal
rule, under which government budgets would have to be balanced,
which would mean that after stripping out one-off revenues and
expenditures and the swings of the economic cycle, the
structural deficit would not be higher than 0.5 percent of GDP.
Only countries with a debt/GDP ratio significantly below 60
percent could be allowed higher structural deficits.
The balanced budget rule would also have to be introduced
into constitutions of euro zone countries and include automatic
correction steps to bring the deficit down. The European Union's
highest court would have the right to verify that the rule is
transposed in national legislation.
Euro zone countries which had budget deficits higher than
the EU ceiling of three percent of GDP would have to submit to
the European Commission and euro zone finance ministers a plan
of structural reforms to durably reduce the shortfall.
The implementation of the plan would be monitored by the
Commission and the ministers. Euro zone countries would also
have to report their debt issuance plans ahead of time.
If a country breaches the three percent deficit limit, it
would automatically face sanctions unless a qualified majority
of euro zone finance ministers decide otherwise.
The draft said that leaders agreed to quickly give the
European Commission new powers to monitor and assess budget
drafts of euro zone countries with deficits above three percent.
"The Commission will in particular examine the key
parameters of the draft budgetary plans and will, if needed,
adopt an opinion on these plans," the draft said.
"In case the Commission identifies particularly serious
non-compliance with the Stability and Growth Pact (EU budget
rules), it will request a revised draft budgetary plan," the
The draft said that for the longer term, the euro zone would
continue to work on deepening fiscal integration to better
reflect the interdependence of euro zone countries.
"This will imply more intrusive control of the national
budgetary stance by the EU, such as the ex ante approval of
budgetary plans," the draft said.
"In this context, the possibility of moving towards common
debt issuance in the longer term and in a staged and
criteria-based process, should be considered, once significant
progress will have been made in reinforcing fiscal rules and
discipline," said the draft of the point that is being rejected