BRUSSELS, Belgium -- International Monetary Fund experts argue the eurozone should set up a joint budget to strengthen the 17-country bloc's ability to weather economic shocks and help its hardest-hit members avoid severe recessions.
Establishing a risk-sharing system would help offset the weaknesses in the currency zone that have contributed to its debt crisis, the IMF experts said in a discussion paper published Wednesday.
A joint budget or rainy-day fund with dedicated tax revenues could, for example, pay for infrastructure projects or public services across the bloc. That would provide an automatic safety net for countries hit by a downturn, "containing the social and economic cost of the crisis," the report said.
"Such a fund would collect revenues from euro area members at all times and make transfers to countries when they experience negative shocks," it said.
The report's proposals go far beyond what is currently envisioned in Europe and would face huge political and legal hurdles. They would weaken national sovereignty by handing more money and power to joint institutions.
Stronger economies like Germany are likely to reject them as an introduction through the backdoor of permanent transfer payments to financially weaker countries. The concern is that countries benefiting from the payments would be less willing to make unpopular reforms.
While acknowledging such hurdles and drawbacks of deeper fiscal integration, the IMF's paper is unequivocal in stressing that the bloc needs to strengthen its institutions if it wants to be better prepared to weather the next crisis.
"It's meant to engage a discussion," IMF official Celine Allard said in a conference call about the study. "It's a complex issue for which decisions will not be taken overnight."
Europe's three-year-old debt crisis showed that problems in one country -- be they excessive government debt as in Greece or massive bank failures as in Ireland -- can quickly erode confidence in the whole bloc, threatening its financial system and economy.
Drawing out today a roadmap toward greater fiscal integration would support the eurozone's efforts to fight the crisis and "anchor confidence in the viability of the euro area," Allard insisted.
A centralized budget, which could also issue jointly guaranteed debt underwritten by dedicated tax revenues, could provide an insurance mechanism that would limit the contagion effects of a financial crisis, she added.
The report suggests a budget or rainy-day fund could be worth up to 2.5 per cent of the bloc's output of about 10 trillion euros ($13 trillion), or about 200 billion euros. However, such a budget would have to be accompanied by tight oversight, including a possible suspension of payments to a country if it is found in violation of deficit and debt rules, it said.
Since the start of its current crisis in 2010, eurozone countries have bailed out five of their member states with rescue loan packages, helped by the IMF, and have created institutions to manage the crisis. The bloc is also setting up a so-called banking union, which aims to create a centralized bank regulator and a separate authority with the power to unwind, restructure or rescue banks.
In the past, France has also called for a common eurozone budget, but provided few specifics. Germany has been reluctant, hinting it would not agree to anything bigger than a mere 10 to 15 billion euros -- or up to 0.015 per cent of the bloc's GDP.
The wider 28-nation European Union already has a budget of its own, but its spending is mostly focused on long-term projects and can only serve to a very limited extent as a tool to prevent or soothe economic shocks.
