Plan for separate eurozone budget on EU summit menu

image captionThere is much talk of a two-tier Europe emerging from the debt crisis

EU leaders meeting in Brussels next week will consider creating a separate budget for the 17-nation eurozone, in a drive to unite fiscal policy.

Such a budget, outside the seven-year framework of the 27-member EU, could centralise tax and spending decisions.

European Council President Herman Van Rompuy says he wants the EU to have specific proposals before next year, to help stabilise the eurozone.

UK Prime Minister David Cameron says the eurozone will need its own budget.

Mr Van Rompuy addressed the budget issue at a conference organised by the Friends of Europe think-tank in Brussels on Thursday.

"We have to do everything to stabilise the situation in the eurozone, and if a fiscal capacity or a separate budget can help, then you have to reflect on it," he said.

He argued that any currency union needed a fiscal capacity - a budget of some kind - which could play a stabilising role when needed. "When a country is hit by an economic downturn, independent of other countries, we have no instrument [to help]", he said.

The draft EU summit conclusions for next week say "mechanisms for fiscal solidarity, eg via an appropriate fiscal capacity, should be explored".

The draft conclusions say the eurozone's own "fiscal capacity" - that is, a budget - would be "specific to the euro area and therefore not be covered by the Multiannual Financial Framework". That framework - the MFF - is the EU's long-term budget, amounting to about 1% of the EU's GDP.

The EU is holding tough negotiations on its next budget, for 2014 to 2020, and there will be a special budget summit next month. Mr Cameron has warned that he will block any "massive increases" in that budget.

Mr Van Rompuy first floated the idea of launching a separate eurozone budget in an issues paper in June.

He stressed that the eurozone budget would be quite different from the MFF.

UK keeps distance

Last December Mr Cameron vetoed an EU-wide treaty to co-ordinate budget policies and impose penalties on rule-breakers. The fiscal compact, in line with German demands for budgetary rigour, is binding on signatory states but is not an EU-wide treaty because of the UK veto.

In a BBC interview on Sunday, Mr Cameron said: "There will come a time I believe where you're going to need to have two European budgets - one for the single currency, because they're going to have to support each other much more, and perhaps a wider budget for everybody else."

At their 18-19 October summit in Brussels the EU leaders also plan to discuss "contractual" agreements between eurozone states and EU institutions, to make economic reforms binding.

"The idea for the euro area Member States to enter into individual arrangements of a contractual nature at the European level on the reforms they commit to undertake and on their implementation should be explored," the draft summit conclusions say.

Such contracts could be modelled on the binding austerity measures now in place in Greece, Portugal and the Republic of Ireland - the recipients of massive EU bailouts. The measures are aimed at preventing the accumulation of excessive debt and are a condition for the bailout instalments.

EU budget 'showdown'

Mr Cameron's Conservatives warned on Thursday that a "showdown" was looming in the MFF budget talks, after the European Parliament's budget committee voted for extra spending in some areas.

The MEPs called for "significant increases" in EU funding for competitiveness, small businesses (SMEs), entrepreneurship, sustainable infrastructure and research and innovation.

They also said there must be no cuts to the allocations for agriculture and for the EU's poorer regions - so-called "cohesion" funding.

The UK Conservatives' leader in Europe, Richard Ashworth MEP, said "it seems we are heading for a budgetary crisis".

The budget committee is also calling for an end to EU budget rebates - a system which returned 3.6bn euros (£3bn; $4.6bn) to the UK last year - and for some tax revenue to go straight into the EU budget. Mr Ashworth flatly rejected both proposals.