European document backs 'pact'

Euro zone countries should pass special national legislation to safeguard the health of their public finances, as suggested by Germany and France, a document prepared for discussions of euro zone leaders showed.

The document, written by aides to European Commission president Jose Manuel Barroso and European Council president Herman van Rompuy, sets the scene for talks of leaders on a euro zone competitiveness pact on March 11th in Brussels.

Berlin, backed by Paris, set ideas for the competitiveness pact at an EU summit on February 4th, but many EU states were angered by what they saw as a "fait accompli" by the two biggest euro zone countries and the measures contained in it.

Paris and Berlin want the euro zone, which now comprises 17 countries, to accept the pact in exchange for boosting the scope and capacity of the emergency fund for bailing out countries cut off from markets.

A strong deal is seen by financial markets as crucial if policymakers are to get on top of a still broadening debt crisis now threatening Portugal and Spain.

Discussions on the fund, the European Financial Stability Facility (EFSF) focus on raising its effective lending capacity to €440 billion from €250 billion, allowing it to buy bonds of distressed governments or lend cash for debt buy-backs.

But before any changes to the EFSF can be made, Berlin wants others to pass national laws similar to Germany's own, which limit the size of a country's debt.

France has said it was ready to adopt a similar law, but some countries, like debt-laden Greece, oppose the idea.

The four-page document, entitled "Enhanced Economic Policy Coordination in the Euro Area, Main Features and Concepts" and drafted following consultations with euro zone capitals ahead of March 11th, says each country could pick its own solution.

"Euro area member states ... should retain the choice of the specific national legal vehicle to be used, but should make sure that it has a sufficiently strong binding nature (e.g. constitutions or framework law)," the document said.

"The exact formulation of the rule should also be decided by each country (eg it could take the form of a 'debt brake', rule related to primary balance or an expenditure rule)," the document said.

Another idea is to raise the retirement age in euro zone countries to ease the burden on public finances at a time when demographic trends point to an ageing and therefore shrinking workforce.

Germany has raised its retirement age to 67 but the document does not set any numerical targets, only stressing the need for pensions and social benefits to be sustainable.

It said sustainability would be assessed on the basis of a sustainability gap indicator measuring if debt levels were sustainable under current policies.

"Countries facing major challenges as regards pensions and social benefits systems should be identified and should commit to address these challenges in a given timeframe," it said.

To address such challenges it was necessary to align retirement age with life expectancy, reduce early retirement schemes and use targeted incentives to employ older workers and promote life-long learning, the document said.

Austria has expressed opposition to euro zone intervention in national pension systems.

Another contentious point of the Franco-German wish-list is scrapping wage indexation, about which Austria, Spain, Belgium and Luxembourg have all expressed reservations.

The document from Mr van Rompuy and Mr Barroso said wage and productivity developments would form the basis of assessment of progress towards greater competitiveness.

Unit labour costs would be monitored and compared to other euro zone countries and main trading partners. They would be assessed for the whole economy and for major sectors.

As with pensions, countries which face major challenges because of large and sustained rises of unit labour costs would be identified and should address them in a given timeframe.

While each country should decide on its own how to manage unit labour costs, respecting its own traditions of talks with workers and businesses, the document said governments should pay particular attention to enhancing decentralisation of wage bargaining and improving "the indexation mechanism".

The document also calls for wage restraint in the public sector because of its impact on wages in the private sector.

Germany and France have also proposed a common corporate tax base in the euro zone.

While different from a common corporate tax rate, some countries oppose such a discussion fearing it could eventually lead to a discussion of the rate as well and because tax issues are a jealously guarded prerogative of national parliaments.

"Developing a common consolidated corporate tax base could be a way to ensure consistency in the national tax systems, without harmonising tax systems," the document said.

It said that if not all euro zone countries would accept such common tax base - a hint at Ireland which is fiercely opposed to any talks on its relatively low corporate tax - it could be introduced by a smaller group.

It said the Commission, the EU executive, would make a proposal on the common corporate tax base in the coming weeks.

The document also calls on euro zone countries to put in place national laws on bank resolution - another idea floated by France and Germany on February 4th.

But not all of the reforms would have to happen now.

"Each year members states of the euro area will agree at the highest level on a set of concrete deliverables to be achieved within 12 months. The selection of the specific policy measures to be implemented will remain the responsibility of each country," the document said.

Reuters