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France and Germany strike deal on draft for eurozone integration

Anna Isaac
French President Emmanuel Macron and German Chancellor Angela Merkel share a press conference after bilateral talks  - AFP

The eurozone’s two biggest economies, France and Germany, have agreed to set up a common budget for the currency bloc marking a major step towards greater integration.

The move, long championed by France and backed by the world’s lender of last resort, the International Monetary Fund (IMF), was decided by the two countries’ leaders Emmanuel Macron and Angela Merkel after talks on Tuesday.

The exact size and structure of the fund has not been agreed but is set to be introduced by 2021.

Mr Macron described it as a “real budget with annual revenues and spending”.

Ms Merkel said the move was essential in order to make the economic bloc more resilient. She added it was necessary because “an economic and monetary union can only remain intact if economic policies converge".

The leaders met ahead of a summit of European Union leaders on June 28-29 and have developed a “draft for a new eurozone", Ms Merkel said.

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The scope of the budget has been the source of a long-running tug of war between Berlin and Paris. Mr Macron has previously called for it to amount to several hundred billion euros, whereas Ms Merkel has indicated Germany’s expectations were for billions in the low double digits.

The bilateral agreement risks angering other eurozone members who have signalled discontent with Franco-German power-broking.

A joint statement issued in March by eight other members of the 19 strong eurozone, including Ireland and the Netherlands said that the future of the monetary union “is relevant to all and should therefore be discussed and decided by all”.

The joint paper focused on these immediate “need to haves” rather than additional “nice to haves”.

It comes after the Organisation for Economic Co-operation and Development (OECD) said Brexit leaves a €10bn (£8.8bn) annual hole in the EU’s budget which presents an opportunity to reform the entire structure.

Proposals for harmonised spending include focusing on cross-border infrastructure projects, research and development, and the fight against climate change.

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Co-ordinated funds could also be used to tackle to growing challenge of border security, the OECD said.

The joint budget should deal with economic problems as well, including by sending more cash to the poorest parts of the EU.

“The EU budget could become more inclusive by supporting better those left behind in the EU,” the OECD said.

“The European Globalisation Fund needs to be improved and its scope broadened not only to help workers displaced by globalisation or an economic crisis, but also due to other reasons such as automation.

“Additional funding to support the career and mobility opportunities of less qualified workers, especially youth, through strengthened mobility programmes would also be helpful."

Economic crises could be better addressed with a central budget, its analysts believe.

EU-wide unemployment insurance has proved politically impossible to achieve so far, as critics see it as further evidence of financially cautious countries funding the spending of the fiscally incontinent.

But the OECD proposed a more limited system of “unemployment benefit re-insurance” to share the risks of an economic slump.

“While financed by all eurozone countries, financing costs would over time be raised for countries that repeatedly draw on the fund,” the OECD said.

“This would mitigate the risk of permanent transfers and provide a fiscal incentive to each country to pursue its own stabilisation policies. It would also be an instrument that, by reducing the negative impact of downturns, could help to increase citizens’ trust in the euro project.”

Christine Lagarde, head of the IMF, had called for a “rainy-day fund” for the eurozone, earlier this year. Ms Lagarde argued that this would “provide support in bad times” provided member countries meet with tough EU rules on public spending.