June 20, 2018 / 3:31 PM / 4 months ago

UPDATE 1-German finance minister defends euro reforms against conservative attack

* Conservatives opposed to more euro transfers

* Scholz defends unemployment insurance system

* CSU says reforms could split European Union (Releads with Scholz)

By Tom Körkemeier and Gernot Heller

BERLIN, June 20 (Reuters) - Germany’s finance minister on Wednesday defended a euro zone reform blueprint agreed with France against criticism by Chancellor Angela Merkel’s conservatives that it could undermine monetary stability.

Members of Merkel’s conservative bloc opposed to larger financial contributions to the euro zone reacted with scepticism to her agreement with French President Emmanuel Macron to create a common budget for the currency bloc.

Merkel and Macron hailed a “new chapter” for the euro zone after talks at the Meseberg retreat outside Berlin on Tuesday where they praised the budget as a tool to strengthen economic competitiveness in the currency union. But details were scant.

Merkel’s conservative bloc is divided over immigration and stiff resistance to the euro zone plans could further erode her authority and threaten to unravel her coalition government three months after it took office.

Finance Minister Olaf Scholz, whose Social Democrats (SPD) are Merkel’s junior coalition partners, said in a speech at a banking event that the euro zone budget was only a small component of the reform package agreed with France.

“We are standing at a crossroads and we have decided to go down a well-paved street called the European Union,” he said.

He also defended a proposal to create a Europe-wide unemployment insurance system, saying it would make the euro zone more resilient to economic shocks.

Conservative lawmakers, especially from the Christian Social Union (CSU), the Bavarian sister party of Merkel’s Christian Democrats (CDU), are not convinced.

“The CSU will not be part of any attempt to join a transfer union,” Markus Blume, the Bavarian party’s general secretary, told the Ausburger Allgemeine newspaper. “Financial robustness and monetary stability are non-negotiable for the CSU.”

Merkel said on Tuesday the new budget would be used to strengthen economic convergence within the euro zone, which was almost torn apart by a debt crisis that took hold in 2009.

‘SHADOW BUDGET’

Macron said the euro zone budget would be operational by 2021 with annual revenues and spending.

The two leaders had decided to focus on broad issues to leave more room for negotiations with the other 17 euro members, which leaves scope for the plans to be watered down.

National contributions and European resources would be used to fund the budget, the leaders said in their declaration.

“The European Union will have a shadow budget for the euro zone,” CSU lawmaker Hans Michelbach told Reuters.

“For us this is more like splitting Europe because countries that are not using the euro will be excluded. I am stunned by the promise that was given to Macron,” he added, referring to Merkel’s support for a euro zone budget.

Scholz said however that differences over plans to introduce an EU-wide deposit guarantee scheme were still to be bridged. Germany and eight other EU members say euro zone banks must first reduce exposure to risks before the project can start.

Deposit insurance for the euro zone is one element still missing from an EU banking union. It would bolster the confidence of savers and protect deposits of up to 100,000 euros in any euro zone bank.

“Now it’s about the details. Much remains unclear and should be made public, including the size of the new euro budget and the level of German contributions,” said CDU lawmaker Eckhardt Rehberg, parliamentary speaker on budget policy for the CDU/CSU.

“We will have to look carefully at the justifications given for new euro funds and credit lines in addition to existing ones,” Rehberg added.

He said the conservatives would not lend Merkel and Scholz support for the creation of a Europe-wide unemployment insurance system nor for a euro tax to fund additional spending plans.

Under the system, a euro zone member facing an economic crisis that leads to massive job losses and a heavy burden on its social-security system could borrow from a joint reinsurance fund. (Writing by Joseph Nasr Editing by Matthew Mpoke Bigg)

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