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ANALYSIS-EU faces battle over closer economic union

By Reuters Staff
May 21, 2010

By Timothy Heritage

BRUSSELS, May 21 (Reuters) – Agreeing on a $1 trillion safety net may prove the easy part of saving the euro now the European Union’s leaders are turning to the divisive issue of tightening economic policy coordination.

The European Commission wants to reinforce economic surveillance and budget discipline to strengthen the euro zone and prevent a repeat of Greece’s debt crisis in any of the other 15 countries that use the single currency.

But a battle is looming over the proposals even before the first meeting on Friday of a task force set up by EU President Herman Van Rompuy to come up with ideas on how to toughen EU budget rules and improve policy coordination.

A call by the Commission to see governments’ budget plans before they are submitted to national parliaments has caused some countries to fear their sovereignty is threatened.

Divisions have also been exposed by a German ban this week on short-selling, despite a vow by Berlin and Paris on Thursday to work together on the euro zone crisis.

Concerns are growing that the EU, which represents more than 500 million people, will miss the best chance in years to agree on far-reaching reforms to stabilise the euro.

“The EU will have to cobble something together by the end of this year but it is an open question whether it will be meaningful or not,” said Daniel Gros, director of the Centre for European Policy Studies think tank.

He said the 27 member states could find it is much harder to secure a deal on closer economic surveillance in talks that will last several months than it was to reach agreement on the 750 billion euro safety under pressure from financial markets.

“If you’re in a situation where you have months to agree and everyone wants it be as perfect as possible on paper, but in reality containing as few constraints as possible on member states, the situation is completely different,” Gros said.

He said a meaningful deal might also be harder to come by if the euro recovers after falls in recent weeks and the 16-country euro zone’s sovereign debt crisis eases, reducing pressure on EU leaders to carry out far-reaching reforms.

GOOD TIMES, BAD TIMES

The euro has enjoyed many successful years in the 11 years since its creation but it has been undermined by the debt crisis in Greece, which has won a 110-billion-euro ($136.6 billion) rescue package from the EU and International Monetary Fund.

The European Commission wants to tighten mutual fiscal supervision to ensure often-flouted rules on budget deficits and debt limits are respected, and wants faster and tougher sanctions imposed on budget sinners.

It also wants surveillance of the vast differences in competitiveness between the euro zone countries beefed up.

But some national leaders are wary of taking steps towards greater economic integration. Doing so could be political risky in countries where the global financial crisis has increased nationalist sentiment.

There is also no appetite for treaty change to reinforce the budget rules, after the EU spent almost a decade securing agreement on the Lisbon treaty reforming its institutions.

France and Germany have said the Commission proposals go in the right direction, but they are likely to balk at giving others any influence over their budgets.

Germany and France also have different visions of the euro zone’s future. Berlin favours tough budget discipline, while France puts more emphasis on close economic policy coordination and boosting economic growth.

“Monetary union hinges on Germany, and on a political level Germany can’t do anything without working together with France. They are the key decision makers in this,” said Fabian Zuleeg, chief economist at the European Policy Centre think tank.

“At the moment it’s in the big countries that there are questions but there will also be questions about how this will apply to weaker performing countries. Are they willing to sign up to something if it looks like it will have teeth? And if we are talking about automatic sanctions, countries such as Spain, Ireland and Portugal might have queries about it.”

Sweden has also expressed reservations about some of the proposals and they are unlikely to please Britain. But London and Stockholm are not in the euro zone so would not feel the impact of the planned reforms as extensively as others.

MERKEL IN DIFFICULT POSITION

German Chancellor Angela Merkel is in a particularly difficult position because many Germans resent being Europe’s paymasters, bailing out other nations they regard as profligate.

Any far-reaching reforms of the euro zone could face a challenge in the German constitutional court. Even so, Germany is widely expected to do what it takes to stabilise the euro.

Some EU leaders see the debt crisis as a chance to finally pursue the dream of closer economic union that was set out by the founders of what became the EU. Such moves have not been discussed so intensely by policymakers for years.

But economic analysts say the EU leaders need to narrow the gap between their rhetoric about a united and integrated Europe and the harsh reality of national interests and politics if they are to make much progress towards closer integration.

“The problem is that when countries signed up to the single currency they were not made aware that it would require such integration. Political elites need to start explaining why it does,” said Simon Tilford, chief economist at the Centre for European Reform in London.

(Editing by Angus MacSwan)

(timothy.heritage@reuters.com; +32 2 287 8632; Reuters Messaging: timothy.heritage.reuters.com@reuters.net)) ($1=.8054 Euro)

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