November 21, 2018 / 5:23 PM / 19 days ago

Germany proposes tough conditions for euro zone rescue fund: document

BERLIN (Reuters) - Germany’s plans for a “European Monetary Fund” to help euro zone states in difficulty would set strict eligibility criteria that shut out those who are failing to tackle high national debt.

FILE PHOTO: The national flags of Italy and Germany and the EU flag are pictured atop the Reichstag building, seat of the German lower house of parliament Bundestag, before a meeting of German Chancellor Angela Merkel and Italian Prime Minister Mario Monti in Berlin, January 11, 2012. REUTERS/Tobias Schwarz

Many euro zone governments want the existing European Stability Mechanism (ESM) to be built up into a more robust bailout fund to help tackle future crises on the scale of the post-2008 Greek debt crisis, but ideas differ greatly.

According to German Finance Ministry proposals seen by Reuters, the fund would be accessible without strings only to countries that had experienced an “asymmetric economic shock outside their political control”.

The proposals, first reported by the newspaper Die Zeit on Wednesday, do envisage a role for the fund in helping heavily indebted states out of crisis, a task currently carried out by the European Commission. But this would take the form of a more stringent “macro-economic adjustment program with ex-post conditionality”.

Germany, Europe’s largest economy, has traditionally been among the European Union’s most fiscally hawkish members, and the new proposals sit squarely in that tradition.

Making the fund available to countries with unsound finances would risk creating “moral hazard”, the document says, “where low-interest ESM loans are misused to postpone necessary budgetary adjustments and structural reforms”.

To qualify for no-strings assistance, the country would need to have a budget deficit below 3 percent of GDP and a public debt below 60 percent of economic output - or else show that it had cut its public debt by 0.5 percentage point of GDP in each of the three previous years.

Euro zone finance ministers are expected to agree by the end of the year on how they want to develop the zone’s financial stabilization funds.

Italy, which had a debt-to-GDP ratio of 131 percent in 2017, is often described as a country whose $2 trillion economy is large enough to endanger the entire region’s economic stability if it ever entered a serious debt crisis.

The European Commission took the first step on Wednesday toward disciplining Italy over its 2019 budget, which Brussels said would not reduce the debt mountain.

The row, triggered by the expansionary policies of Rome’s new euroskeptic government, has hammered the value of Italian bonds, and also the share price of Italian banks that hold large quantities of those bonds, unnerving Italy’s euro zone partners.

Writing by Thomas Escritt; Editing by Kevin Liffey

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