By Nick Mann | 26 June 2012

Leaders of the main European Union institutions today published plans for full European economic and monetary union.

The document, produced ahead of the summit of EU leaders in Brussels later this week, proposes a ‘strong and stable architecture in the financial, fiscal, economic and political domains’.

Towards a genuine economic and monetary union sets out ‘a vision for the future of the economic and monetary union and how it can best contribute to growth, jobs and stability’. It was drawn up by European Council president Herman Van Rompuy in ‘close co-operation’ with the presidents of the European Commission, European Central Bank and the eurogroup of eurozone finance ministers.

It says that although policy making at a national level is the most effective method for many economic decisions, national policies must ‘reflect the reality’ of being in a monetary union.

‘To ensure stability and growth in the euro area, member states have to act and co-ordinate according to common rules,’ Van Rompuy wrote. ‘There have to be ways on ensuring compliance when they are negative effects on other EMU members.

‘This is necessary to guarantee the minimum level of convergence required for the EMU to function effectively.’

Advocating a ‘qualitative move’ towards a fiscal union, the report says greater pooling of decision-making on budgets should be accompanied by mechanisms to prevent and correct unsustainable fiscal policies in individual member states.

This could include upper limits on budget balances and on government debt levels, giving the eurozone bloc the power to require changes to budgets that violate fiscal rules.

In the long term, the report says, fully fledged fiscal union would involve development of a eurozone fiscal body, such as a treasury, as well as a central budget that would then be spent through national budgets.

An integrated financial framework would be built on a banking union, with two central elements – single European banking supervision and a common deposit insurance and resolution framework.

This ‘would ensure that the supervision of banks in all EU member states is equally effective in reducing the probability of bank failures and preventing the need for intervention by joint deposit guarantees or resolution funds’, the report says.

Van Rompuy said moves towards an integrated economic policy framework were needed as an ‘essential counterpart’ to the financial and fiscal union. They should focus on ‘strong and sustainable’ economic growth and employment, as well as promoting social cohesion.

‘Stronger economic integration is also needed to foster co-ordination and convergence in different domains of policy between euro area countries, address imbalances and ensure the capacity to adjust to shocks and compete in a globalised world economy,’ he added.

The report states that the next steps for the proposals are to develop a specific and time-bound ‘road-map’ to achieve a ‘genuine’ EMU. A report could be submitted to the December meeting of EU leaders.