Franco-German proposal a 'breakthrough' in euro zone reform plan: Eurogroup head

By Jan Strupczewski and Francesco Guarascio

BRUSSELS (Reuters) - The Franco-German proposal of a euro zone budget could represent a "breakthrough" for reaching a deal on a euro zone reform package next month, said the chairman of the zone's finance ministers, though Italy quickly distanced itself from 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.

All EU finance ministers except Britain, which is due to leave the bloc next March, will discuss the proposal on Monday as part of a package of reforms to be agreed in December to strengthen the euro zone's resilience to crises.

"The contribution of France and Germany on the euro zone budget is an important topic for today's discussion," Mario Centeno, chairman of euro zone finance ministers, said.

"It is a very important contribution. It can be a sort of a breakthrough towards December," he told reporters.

Under the join Franco-German 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.

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, was quick to shoot down the proposal.

"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 to help stabilise the euro zone during an economic downturn or a crisis. More talks are 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.

Another part of the euro zone reform package that the ministers will discuss on Monday will be linked to making euro zone sovereign debt restructuring easier.

The ministers will also discuss the role of the euro zone bailout fund ESM in a potential sovereign debt restructuring.

(Reporting By Jan Strupczewski; Editing by Gareth Jones)