Factbox - German-French and EU proposals for Euro zone

BRUSSELS (Reuters) - European Union leaders will discuss proposals for tighter euro zone integration on December 8-9, with the aim of bringing deficits and debt much more strictly into check, a move that may give the European Central Bank room to step up purchases of sovereign bonds and reassure financial markets.

On Tuesday, the chairman of the EU summit, Herman Van Rompuy, delivered a report to EU leaders on what can be done to move towards an economic union to match the monetary union that already exists between the 17 euro zone countries.

On Wednesday, German Chancellor Angela Merkel and French President Nicholas Sarkozy presented their own ideas on tighter integration in a letter to Van Rompuy.

Below are the key elements of both approaches -- the summit on Thursday and Friday will have to find a balance between them.


Both approaches acknowledge that the EU has already agreed on stronger budget rules, called the Stability and Growth Pact, which envisage more and swifter financial sanctions for breaking the rules.

It also has agreed on ways to prevent the build-up of macroeconomic imbalances and on ways to boost competitiveness of its members.

But both say more is needed to reassure investors about the soundness of euro zone public finances.


Both the Van Rompuy and the Franco-German proposals call for euro zone countries to have a rule in their constitution (or equivalent law) that budgets have to be balanced in structural terms, which means after stripping out one-off expenses and revenues and the impact of the economic cycle.

The Van Rompuy report says such a balanced budget rule would be enough to bring down debts of euro zone countries below the 60 percent of GDP ceiling envisaged in the current EU treaty.

Merkel and Sarkozy, however, want the procedure for debt reduction below 60 percent, which is already part of the revised Stability and Growth Pact -- the EU’s budget rules -- to be enshrined in a changed, or new EU treaty.

Van Rompuy believes the balanced budget rule could be introduced without a full reopening of the treaty, just through a protocol revision that could be done more quickly and at less risk of failure during ratification in euro zone countries.


Both Van Rompuy and France and Germany say that if a euro zone country allows its budget deficit to rise above 3 percent of GDP, it should face automatic sanctions, which could be stopped only if three quarters of euro zone ministers are against them.

Van Rompuy proposes that when a country has an excessive deficit the Commission should have the right to review its budget draft before it is voted on in the national parliament and send it back for changes if it is not in line with what was agreed.

Merkel and Sarkozy propose the country with the too high deficit should agree with the Commission and euro zone finance ministers a series of fiscal and structural reforms to get back in line.

Both propose that if the country with the excessive deficit does not mend its ways, it should face increasingly unpleasant consequences.

Van Rompuy suggests that if a euro zone country is under a bailout programme and does not meet agreed reform targets, the Commission should get exceptional powers of ex-ante approval of major economic reforms.

Paris and Berlin call for a “sequence of interventions of increasing intensity” into the country’s right in response to continued infringement, with the sanctions proposed by the Commission adopted automatically unless stopped by a qualified majority of finance ministers.


Both the Van Rompuy report and the Franco-German letter propose that the European Court of Justice, the highest EU court, should control if the balanced budget rule is adopted in to national laws.


France and Germany want national parliaments in the 17 countries sharing the euro to say that they will take into account what is decided on economic and budgetary policies at the EU level.

Van Rompuy does not address that issue.


Van Rompuy proposes that in the longer perspective euro zone countries should have the possibility of joint debt issuance -- creating euro zone bonds, or stability bonds as the European Commission calls them.

France and Germany do not address the issue in their letter, but have made very clear euro zone bonds were out of the completely out of the question.


Both the Van Rompuy report and France and Germany want economic policies in the euro zone to be more alike.

Both mention using the existing legal possibility of “enhanced cooperation” between those EU member states who want to (there have to be at least nine), to achieve that.

The areas that could be in a “new common legal framework” according to Paris and Berlin are financial regulation, labour markets, harmonisation of the corporate tax base, a financial transaction tax and better use of EU funds for growth policies.

Van Rompuy lists also labour markets and pragmatic tax coordination, and adds sustainability of pensions and social security systems.



The Van Rompuy report calls only for a rapid finalisation of the treaty establishing the ESM, while Merkel and Sarkozy say clearly they want the permanent bailout fund to be operational already next year, rather than in mid-2013 as initially planned.


France and Germany want decisions in the ESM to be taken by a majority of 85 percent of the votes rather than unanimity as provided for the existing draft ESM treaty so that small euro zone countries could not stop the ESM from taking action.

Van Rompuy also endorses the 85 percent voting rule by saying the ESM should align its decision making with the IMF, which observes the 85 percent threshold. But he leaves the door open to submit some decisions to the unanimity rule.


Both France and Germany and Van Rompuy want the ESM treaty to say clearly that losses suffered by private bondholders in the case of Greece through the voluntary debt restructuring would not happen again in any other euro zone country.

Both want to say in the ESM treaty that the permanent bailout fund would follow IMF practices with regard to private sector involvement in debt restructuring.


Paris and Berlin say clearly that they want Collective Action Clauses (CAC) -- legal caveats in sovereign bonds that facilitate a potential debt restructuring by preventing minority bondholders from blocking the whole restructuring deal.


Van Rompuy calls for a review of the 500 billion euro ceiling on joint lending by the current European Financial Stability Facility (EFSF) and the ESM that is to replace it.

The idea is not to deduct loans made by the EFSF from the lending capacity of the ESM when it takes over, as envisaged by the current draft ESM treaty but allow the full 500 billion euros of the ESM to come on top of what the EFSF will have lent by then.

Merkel and Sarkozy do not mention that at all, as there is no agreement between them yet on the issue.


Van Rompuy proposes that the ESM should not only be able to recapitalise banks directly (it can now do so only via lending to governments), but also to itself have the features or a credit institution.

This would prepare the ground for issuing the ESM with a banking licence that would allow it to refinance itself at the ECB’s liquidity operations, giving it practically unlimited firepower.


Van Rompuy calls for lending the IMF more money, most likely through bilateral loans from euro zone national central banks, to boost the IMF’s resources that it could then deploy to help the euro zone.

Merkel and Sarkozy do not mention that at all, as there is no agreement between them yet on the issue.

Reporting By Jan Strupczewski; editing by Ron Askew