November 9, 2017 / 4:16 PM / a year ago

UPDATE 1-French central bank chief says euro zone needs new crisis instrument

(Adds quotes, context)

By Francesco Guarascio

BRUSSELS, Nov 9 (Reuters) - The euro zone should agree on a mechanism to provide loans to countries hit by an economic crisis, without demanding reforms in return as in case of all the bailouts so far, the governor of the French central bank said on Thursday.

The proposal comes as the European Commission is preparing proposals for Dec 6 to deepen the integration of euro zone economies and strengthen their capacity to face economic shocks after a decade-long financial crisis.

“I suggest creating a ‘Stabilisation Lending Instrument’ at the euro area level ... that would provide loans to euro area member states faced with an asymmetric economic shock,” Francois Villeroy de Galhau told a conference in Brussels.

An asymmetric shock is a crisis that hits only one or very few euro zone countries rather than the whole currency area and is caused by external reasons rather than past policy mistakes.

The governor said the new loan instrument should come without a bailout programme or austerity measures, but would be available only to those who respect EU fiscal rules that set a limit on government deficit and debt.

The move is in line with ideas voiced by Klaus Regling, the head of the euro zone bailout fund ESM, but may not go down well in Germany, which favours offering financial support only under strict conditions.

Villeroy de Galhau also said the no-strings-attached loan could be handled by the ESM, which should be turned into a European Monetary Fund “with the role of crisis prevention in a broad sense”.

The strengthened ESM should be chaired by the president of the Eurogroup of euro zone finance ministers, who should also be a member of the European Commission, he said.

Decisions on providing such loans should be taken by a majority vote, rather than unanimity, he said.

Villeroy de Galhau said the more ambitious project of creating a special euro zone budget, called a fiscal capacity, should be left for later.

Berlin opposes creating a euro zone fiscal capacity saying it is not needed in a stable monetary union. France, on the other hand, would like to see a euro zone budget of several hundred billion euros. (Reporting by Francesco Guarascio; editing by Jan Strupczewski)

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