HELSINKI The euro zone needs a way to share economic risks through a fiscal mechanism and through capital markets, the head of the euro zone bailout fund said, noting a euro zone budget did not have to entail debt mutualisation or permanent transfers.
European Union institutions and governments are re-thinking how the single currency area is organised after crises since 2008 showed weaknesses in the way it is governed.
The European Commission, the EU executive arm, is to come up with proposals on how to further develop the euro zone, which now comprises 19 countries, by the middle of next year.
"From my perspective as an economist, the biggest remaining challenge in the EMU is the lack of economic risk-sharing," the head of the European Stability Mechanism Klaus Regling said.
"This can take place through fiscal mechanisms and through capital markets. Together, they help smooth consumption, demand and business cycles and make national economies more resilient," he said.
He said that such risk-sharing was underdeveloped in the euro zone, especially through capital markets. In the United States as much as 80 percent of an asymmetric shock was evened out thanks to the mechanisms in place there while in the euro zone it was below 40 percent, he said.
The whole European Union of 28 countries has a budget, equal to 1 percent of gross domestic product which provides transfers from the richer countries to the poorer ones.
Regling said a separate euro zone budget would not need to make any additional transfers or joint debt issuance -- a notion that Germany, euro zone's main economy, is adamantly against.
"It could be worth to set up an additional fiscal capacity for the euro area for risk-sharing purposes," he said.
"One idea for such a capacity is a rainy day fund, something that exists in most U.S. states. Countries would get support from such a fund in bad times, and they would pay the money back once they recover," he said.
"Another option is a centrally managed US-style unemployment fund countries would pay into and draw on during a recession," he said.
(Writing By Jan Strupczewski)