Eurozone governments are considering cheap loans to governments as an incentive to undertake structural reforms which pay off only in the medium-term, an EU document showed on Friday, introducing for the first time a discussion on fiscal transfers. The document will form the basis of discussions of senior euro zone officials who will meet in Brussels on November 26 to prepare the next European Union summit on December 19-20.
The loans would be part of so-called contractual arrangements, which would be legally binding contracts with economic reform targets and macroeconomic milestones that trigger the payout of tranches of the agreed loan.
The loans would be attractive because they would carry an interest rate lower than the one a government could get on the market. In that respect, it would amount to a degree of subsidised lending, ultimately amounting to a mutualising of risk among involved member states and a degree of financial transfer - an idea that Germany has long resisted.
"Loans would imply only limited fiscal transfers across countries," said the 9-page document, obtained by Reuters.
"Indeed, the transfer element would be limited to a lower interest rate than the market rate of most beneficiary Member States, capturing the positive externality of the reforms for the EU as a whole," it said.
To qualify, countries would have to draw up legally binding plans for reforms that would then be approved by other euro zone states. The conditionality would come on top of other macroeconomic programmes such as the Stability and Growth Pact and the eurozone's new budgetary oversight powers.
The size of the loan would not be linked to the cost of reform and would be meant as general support for the economy. It is not clear what time-frame the loans would be offered for, or what the limit on the size of any loan would be.
"The specific amount of financing would not be linked to the direct cost of reforms, which generally is difficult to measure," the document said.
"Financial support should be conceived as an incentive or as general support to the overall economy rather than as a compensation for the specific cost of reforms as such, as well as a broader signal of European support to the economic reform agenda of each Member State," the document said.
The loans would not be available to countries running excessive macroeconomic imbalances or currently under a bailout. However, an official briefed on the document said a country like Ireland, which is about to exit a programme, could, for example, request a contract and if approved, benefit from the cheap loans.
The document did not specify how exactly the loans could be financed, mentioning only a European Commission idea from March that it could be either through direct contributions from governments or through designating a new revenue source.
One possibility, the official indicated, might be for the euro zone's rescue fund, the European Stability Mechanism, to raise money on international markets and on-lend capital to a contracted member state, although the exact framework and process of the lending is yet to be finalised.