June 2, 2010 / 3:51 PM / 9 years ago

French bid for euro zone "government" gains ground

BRUSSELS/PARIS (Reuters) - French-inspired plans to create an “economic government” for the euro zone took a step forward on Wednesday when European Council President Herman Van Rompuy threw his weight behind the idea.

The move raised pressure on Germany, Europe’s biggest economy and chief crusader for tougher budget discipline, to accept a new political forum to coordinate economic policy.

“What President Van Rompuy wants is a kind of government at the level of euro zone heads of states and government, where everybody would feel a sense of responsibility. It would be more than a forum. It would entail a euro zone economic government,” one EU diplomat said.

France has long pressed for a more formalized system of coordinating economic policy but the idea has been treated with skepticism by some partners, notably Germany. Berlin fears a challenge to the independence of the European Central Bank and is wary of state intervention in the market economy.

However, the global financial crisis has made Germany more supportive of financial market regulation. Last month it moved ahead with a unilateral ban on some kinds of speculative trades without the backing of its EU partners. German Finance Minister Wolfgang Schaeuble said he expected the ban to pass through both houses of parliament by early July.

Several EU diplomatic sources said Van Rompuy wanted to speed up negotiations on reforming euro zone budget rules and economic governance to clinch a broad political agreement on a package deal at an EU summit on June 17.

That would require a consensus on tougher fiscal discipline rules, backed by sanctions, to avoid any repetition of Greece’s massive accumulation of deficits and debt, which plunged the whole euro zone into crisis this year.

In markets, European and U.S. shares closed higher on Wednesday as upbeat U.S. housing data boosted hopes of a recovery in the world’s largest economy. That offset falls in banks on concerns over the outlook for euro zone growth.

The pan-European FTSEurofirst 300 index closed up 0.1 percent at 1,003.58 points, while the Dow Jones Industrial Average rose 2.25 percent to 10,249.54.

Tensions remained on interbank lending markets and German bonds gained as investors steered clear of more risky peripheral euro zone government debt.

The euro gained 0.2 percent against the dollar to $1.2246, coming off the global lows of the day as the New York session wound down.

Earlier, the currency fell after European Central Bank board member Christian Noyer was cited as saying that its exchange rate against the dollar was around a 10-year average and “by no means at an unusually low level.

TRADE-OFF

Diplomats said a trade-off was likely between German demands for stricter enforcement of budget rules, European Commission proposals for scrutiny of national budgets before they go to parliament and French calls for an “economic government.”

A deal could involve an understanding on the successor to ECB President Jean-Claude Trichet, whose term expires in October 2011.

German Bundesbank chief Axel Weber is a leading contender, but he has irked many member governments and central bankers by publicly dissociating himself from the ECB’s key decision last month to start buying bonds of troubled euro zone countries.

French Economy Minister Christine Lagarde said on Wednesday that euro zone governments should consider creating a formal decision-making structure to reinforce moves toward closer economic cooperation.

French daily Le Monde reported this week that President Nicolas Sarkozy was pressing for regular meetings of euro zone leaders with a secretariat to act as an economic government for the currency bloc.

European Commission President Jose Manuel Barroso said on Wednesday that creating new institutions would not enhance respect for EU budget rules and could reduce the credibility of existing community bodies and methods.

Barroso separately said banks should pay a transaction tax for banks to pay into a fund to help ease economic crises, but said the idea was unlikely to win backing.

German Chancellor Angela Merkel has argued that all 27 EU members, including ones not in the euro, should be involved in economic governance to avoid opening new divisions.

But Britain’s decision not to participate in a $1 trillion EU/IMF emergency mechanism to stabilize the euro, and the new British government’s opposition to closer integration, have made it more likely the euro zone will move ahead alone.

An EU diplomat said Van Rompuy did not believe an economic government would need a separate secretariat, since it could use the existing services of the European Council of EU leaders, over which he presides.

European finance ministers meet next Monday in Luxembourg to try to thrash out a reform package based on proposals from the Commission and Germany for stricter enforcement of fiscal discipline. Euro zone sources said proposals for an “economic government” were not on the agenda for that meeting and had not been discussed in preparatory talks.

At the same time, southern European countries under the fiercest pressure from bond markets are pressing ahead with painful reforms to clean up their public finances, restore lost economic competitiveness and regain investors’ confidence.

On a broader level, the European Union said it would create a watchdog group to control credit rating agencies, and started a review of the way banks are managed.

Spanish Prime Minister Jose Luis Zapatero said on Wednesday his minority Socialist government would present a much-needed reform of the rigid labor market on June 16, with or without a deal in long-running talks with employers and trade unions.

The government would put the politically sensitive reform, designed to help bring down 20 percent unemployment by easing hiring and firing, to a final parliamentary vote without amendments, Zapatero said, setting himself on a potential collision course with the unions.

In Athens, the Greek government outlined plans to sell stakes in state-owned railways, water and real estate companies to raise billions of euros to reduce debt.

(Additional reporting by Paul Day in Madrid, Lefteris Papadimas and Greg Roumeliotis in Athens and Andreas Rinke in Berlin)

Reporting by Julien Toyer in Brussels and James Mackenzie in Paris. Writing by Paul Taylor and Robert MacMillan. Editing by Toby Chopra, Jason Webb, Andrew Hay

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