ADVERTISEMENT

Euro-Area Finance Chiefs Agree on Details of a Common Budget

Euro-Area Finance Chiefs Agree on Details of a Common Budget

(Bloomberg) -- Euro-area finance ministers agreed on the main elements of a small budget for the currency bloc but delayed talks on its financing, capping two years of fraught negotiations over a tool that falls far short of the original sweeping vision of French President Emmanuel Macron.

The compromise struck in the early hours of Thursday marks an effort to balance the fiscal restraint of the EU’s hawkish North against the South’s calls for spending to stimulate the economy. While the agreement on such a tool is significant step for the euro area, disagreement over its size and how the funds will be spent underscores the difficulties in setting up such a financing instrument.

"We have a new pillar in the foundation supporting the euro," said Portuguese Finance Minister Mario Centeno, who presided over the meeting in Luxembourg.

The agreed budget would create a pot of about 20 billion euros ($22 billion) to facilitate investments and reforms and help give a boost to poorer nations, rather than help support economies in a downturn, as was initially intended. The exact sum will be determined at a later stage next year, but estimates are far off what was originally envisioned by the instrument’s advocates.

Open Issue

The ministers failed to agree on a critical aspect of this budget, namely whether it will be financed entirely from the EU’s broader budget, paid in by all the bloc’s governments, or whether it could be topped up by other funding sources in the future.

Countries led by France have been pushing for a deal that would allow funds to be added through further contributions at a later stage, but faced fierce resistance by the Dutch. In the end, they agreed to leave the matter to technical experts and revert to it at a later stage.

Proponents argue that the pared-down instrument could be a foot in the door that could evolve into something more powerful in times of crisis. Skeptics of the plan say it’s a toothless tool that could nonetheless help incentivize laggards to reform.

Other main issues agreed upon include the details of the so-called co-financing rate, which determines how much money governments will receive from this budget for a project and how much they have to put up themselves. This contribution could vary depending on the member’s economic situation, being reduced during a downturn.

Under the agreed compromise, countries would need to put up 25% of the financing themselves, which could be halved during "severe economic circumstances."

According to the deal, 80% of the funds in the budget would be allocated based on countries’ population and gross domestic product per capita. The remaining 20% would be used in a more flexible manner to address specific challenges a nation may face or to support a particularly ambitious package of investment and reform.

--With assistance from Nikos Chrysoloras.

To contact the reporters on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net;Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Richard Bravo

©2019 Bloomberg L.P.