The European Commission today said it was prepared to propose the creation of an IMF-style European Monetary Fund to cope with future debt crises in the euro zone.
EU sources said EU finance ministers would discuss ways to dampen speculation in the sovereign credit default swaps market at their next meeting on March 16th.
The EU is considering creating a rescue fund that could herald fundamental changes in the 27-country union and bring closer economic co-operation following Greece's debt crisis.
The idea of a European monetary fund was floated over the weekend by German finance minister Wolfgang Schaeuble, who said he favoured an institution that commanded "the experience of the International Monetary Fund and similar executive powers".
The European Commission, the EU executive, said today it was ready to propose a rescue instrument for the 16 countries using the euro but did not say whether it would involve treaty changes, which would require the backing of all 27 EU states.
It is unlikely such a fund would be in place in time to help Greece through its debt crisis, which threatens the credibility and unity of the euro zone, but it could help tackle similar crises if they arise in other heavily indebted EU states.
"The Commission is ready to propose such a European instrument that has the support of euro zone member countries," Economic and Monetary Affairs Commissioner Olli Rehn said in a newspaper interview published today.
His spokesman, Amadeu Altafaj, said it was too early to say whether the fund would be just a financial instrument or a new institutional body with its own staff and budget. He said the proposals could be in place by the end of June.
In Germany, Clemens Fuest, who chairs the Finance Ministry's technical advisory committee, said an European Monetary Fund would make sense only if it permitted states to go bust. "Such a fund must provide for an insolvency procedure for countries," he said.
"A solution must be found for this, so that one country's bankruptcy doesn't lead to a new financial crisis, a Lehman II." The failure of the US investment bank Lehman Brothers in 2008 helped precipitate the global financial crisis.
Mr Fuest said an EMF could use its reserves to buy up the debt of bankrupt countries, but bondholders should not be bailed out entirely and would have to accept "haircuts".
Backing for the fund came from German chancellor Angela Merkel who today said while details would have to be sorted out, the European Union needed to have a mechanism to help itself if it hit difficulties, even if it meant changing the EU treaty.
"If the European Union is to be capable of taking action, it will run into such questions. The EU treaty will not be the end of history. Then we would be in a static system. I don't want that, I want Europe to respond to new situations."
She said the euro was based on the two anchors of the "no bailout" clause -- under which no country can take on another euro zone state's debts -- and the Stability and Growth Pact's fiscal deficit rules.
"The question is, what can the European Union do to help itself?" Ms Merkel told reporters .
"I think the idea (of a European Monetary Fund) is a good one," Ms Merkel said adding issues such as who would contribute and how independent it would be still have to be looked at. "Without changing the (EU) treaty, it cannot be done. We would need a treaty change," she added.
Ms Merkel also said she did not rule out taking action if Greece got into an "emergency situation" although she emphasised that this was not the case at the moment.
The Commission will discuss the ideas being floated for a fund at its regular meeting tomorrow, but is unlikely to reach any decision, the spokesman said. He said it was premature to say whether the creation of the new fund would involve changing the EU's treaty, which would likely be a long and tortuous process.
The EU's Lisbon treaty that came into force on December 1st does not allow for bailing out euro zone countries, but it allows for aid to EU members outside the currency area.
The move came as Portugal became the latest euro zone country to announce austerity measures to rein in a ballooning budget deficit as bond markets eased pressure on debt-stricken Greece today after a French pledge of EU help.
Hedge funds have been accused of aggravating the Greek debt crisis by so-called "naked short selling" - betting on a default on the CDS market without owning Greek bonds, hence forcing up the borrowing costs of Athens.
Portugal unveiled plans to cut its deficit to 2.8 per cent of gross domestic product in 2013 from 8.3 per cent this year by trimming spending on civil servants and public investment, and raising taxes on high incomes and stock market gains.
Reuters