Financial incentives to help eurozone push reform

Northern eurozone countries may seek to use financial incentives to push nations in the rest of the region to adopt economic policies they say are needed to shake off the legacy of the sovereign-debt crisis.

Countries that agree to implement improvements in areas such as education, the labour market, and the judicial system would get loans or grants in return, under plans discussed by EU leaders in Brussels yesterday.

With finance ministers reaching agreement on Wednesday on how to deal with failing banks, the idea to tie countries to economic reforms is seen as the next step to harmonise policy across the eurozone.

While the crisis has prompted leaders to back unprecedented levels of economic and regulatory co-ordination, the currency bloc is still struggling with record unemployment and slow economic growth.

Leaders are trying to find a balance between a German-led approach that would make reform pledges legally binding, with limited amounts of money offered in return, and a system backed by the southern eurozone that would spur changes with greater financial enticement.

“We are in favour of making incentives to do reforms,” Italian Prime Minister Enrico Letta said before the meeting.

After EU president Herman Van Rompuy floated the prospect of European financing for countries that promised reforms last year, German chancellor Angela Merkel said only a “limited” pool of as much as €20bn would be made available.

That is equal to at most 0.2% of eurozone GDP, less than the 2% that Brussels research institute Bruegel estimated would be needed to cushion disruptions such as a jolt to energy prices.

Since then, leaders have made no mention of the amount of money that could be on offer in the form of loans or grants.

Under plans drawn up by national officials before the meeting, financial support given as part of reform pledges would come with legally binding conditions.

The plan is still not fully formed. Leaders have given themselves until June to “further explore all options” and agree on the precise nature of the system, the amount of money on offer, and whether it will be in the form of loans, grants, or guarantees.

The incentives would be available for all members of the eurozone — as well as other EU nations who want to participate — except those in a bailout programme, and would be “tailored to the needs of each individual member state”, according to a draft of the summit conclusions, issued on Wednesday.

The draft said that the EU wanted national parliaments to be involved in shaping each reform in order to “ensure full national ownership”.

— Bloomberg