EU welcomes Franco-German budget idea, more work needed

By Jan Strupczewski and Francesco Guarascio

BRUSSELS (Reuters) - A Franco-German proposal for a euro zone budget could be a "breakthrough" for a euro zone reform package next month, but more work on it is needed, the chairman of euro zone finance ministers said as Italy voiced reservations about the plan.

France and Germany agreed on Friday to back a joint euro zone budget focused on financing investment and reforms that help euro zone economies converge.

But some officials see that focus also as its weakness, because it does not stress the stabilisation role for the budget which some countries would like to see in the form of unemployment insurance or a rainy-day fund.

But all EU finance ministers except Britain, which is due to leave the bloc next March, welcomed the proposal on Monday as an important contribution to the package to be agreed in December to strengthen the euro zone's resilience to crises.

"Further work will certainly be needed on the design of possible instruments for competitiveness, convergence and stabilisation," Mario Centeno, who chaired the meeting, told a news conference. He earlier called it a "breakthrough".

Under the joint proposal, the euro zone budget would be available only to those members of the currency bloc that abide by EU rules which limit budget deficits and debt.

That irked Italy, which is at loggerheads with the European Commission and euro zone finance ministers about its fiscal plans in the 2019 draft budget that was rejected by the EU for breaking the rules.

"If, as it seems, it (the plan) damages Italy, it will never have our support," Deputy Prime Minister Matteo Salvini told reporters in Milan.

INVESTMENT

Under the proposal of France and Germany, the euro zone's two biggest economies, the budget's main role is to foster convergence and support reforms "in particular by co-financing growth-enhancing public expenditures such as investments, research and development, innovation and human capital".

The investment role of the budget is just one of many that have been under consideration and partially addresses the need to support capital expenditure which is usually the first victim of a downturn or an economic crisis.

But officials said more talks were likely on other functions, including bridge loans or reinsurance for national unemployment plans.

The proposed management of the budget is a compromise between calls for it to be run only by euro zone governments and the European Commission's proposal to make it part of the wider European Union budget, managed by the Commission.

Paris and Berlin are proposing to put the pool of money, which would come from dedicated taxes and individual national contributions, under a system of shared management where governments would prepare short-term investment plans and the Commission would approve them.

The proposal leaves the controversial issue of the size of the budget for EU leaders to decide.

(Reporting By Jan Strupczewski; Editing by Gareth Jones and Philip Blenkinsop)