European Union Leaders Sign Off on Deal to Strengthen Euro Area

(Bloomberg) -- European Union leaders struck a long-anticipated accord to shore up the euro area that includes a controversial budget for the currency bloc, capping more than a year of negotiations over how best to shield the region from future crises.

The agreement follows repeated calls by governments and top economic officials to take advantage of favorable economic conditions and strengthen the euro area’s crisis-prevention tools. Yet the final compromise falls far short of the sweeping vision of proponents such as French President Emmanuel Macron, who faced strong opposition from several of his counterparts.

The deal signed off by leaders at a summit in Brussels foresees a beefed-up role for the euro-area bailout fund, which will acquire greater powers over future financial rescues and stronger precautionary tools. It also includes the endorsement of a permanent lifeline to the euro area’s crisis fund for failing banks.

Crucially, the accord also includes a mandate to agree on the main features of a euro-area budget by June, a key point of contention between euro-area members that have been split over the need for such an instrument. While countries such as France strongly pushed for a tool that could help economies weather financial shocks, other euro-area members led by the Netherlands strongly resisted such a push, arguing that countries should instead focus on fixing their finances at home.

Competitiveness, Convergence

While the agreement to work on a euro-area budget marks an important step for the bloc, the plan is thin on details, with leaders making no reference on the possible size of such a tool. What’s more, instead of being used to stabilize economies hit by shocks, as France and other proponents have advocated, the leaders agreed that the budget be used for “competitiveness and convergence” -- namely, helping poorer countries catch up. Countries that are in the waiting room to join the euro zone could also use the instrument on a voluntary basis.

This marks a win for the more skeptic states that staunchly resisted any tool that would act as a buffer for economies in a downturn. Still, not all of them viewed the budget proposal with enthusiasm.

“I’m not a friend of the euro-zone budget,” Austrian Chancellor Sebastian Kurz said ahead of the meeting. “I’m of the opinion that it’s necessary to adhere to the rules, as has been stated in the Netherlands, Germany and many other countries," he said.

“Naturally, compromises are necessary," Kurz said.

While the accord included several steps seen as key to ensuring the euro area can better withstand future shocks, the bloc’s governments were unable to reach consensus on a couple of key issues. Chief among them was a joint deposit insurance scheme -- long seen as a thaw in discussions to boost the euro area’s financial sector.

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