AFP - The eurozone debt crisis has shaken the foundations of the single currency alliance. Its leaders are now weighing measures that could either herald a far-reaching operational re-vamp or simply a modest tinkering.
Emergency or temporary bailouts for euro states struggling with huge debts and gaping public deficits have given way to a permanent rescue mechanism.
At the same time, eurozone leaders have begun to talk about giving the bloc greater cohesion with the creation of an "economic government," perhaps through a federal arrangement similar to that of the United States.
There have also been suggestions that eurozone nations jointly issue debt bonds, allowing financially troubled eurozone nations to pool their credit standing with stronger partners.
In an initial gesture, the European Union and the International Monetary Fund joined forces last May to make 110 billion euros available to Greece -- but only after much debate over whether EU sovereignty could be compromised by calling in the IMF.
Then it became clear that Greece was not the only eurozone member under threat. So the EU and IMF went a step further and launched a broader temporary fund that would provide a 750-billion-euro backstop for countries in difficulty.
The fund was called the European Financial Stability Facility (EFSF), financed by the 16 eurozone members, and is due to expire in mid-2013.
But EU leaders understood that the eurozone's debt crisis could not be made to disappear with temporary measures. So at a Brussels summit December 16-17 it approved a permanent rescue scheme -- the European Stability Mechanism -- to replace the EFSF in 2013.
And in what would be another significant development, private sector banks and investment funds that buy government-issued bonds may for the first time have to absorb some of the losses should states require financial help.
The ESM, as is the case with the current arrangement, allows for financial assistance to countries provided they adopt budgetary measures drafted by the EU's executive commission and the IMF.
The engagement of private investors, however, would not be automatic, as Germany had initially wanted: it would be determined on a case-by-case basis.
Private investor contributions would depend on the seriousness of the crisis, as measured by the European Commission and the IMF in conjunction with the European Central Bank.
The commission, the IMF and the ECB would determine if the country concerned merely faced a cash shortage or was in fact facing insolvency.
In the case of a liquidity squeeze private creditors would simply be encouraged to hold on to their investment.
But if a government was deemed to be insolvent, European aid would come with an obligation not only to implement budget reforms but to restructure the debt.
The government concerned would then negotiate with its private creditors. Debt payments could be rescheduled, interest rates lowered or the amounts to be repaid reduced.
The proposal for joint eurozone bonds, advocated most prominently by Luxembourg Prime Minister Jean-Claude Juncker, has sparked considerable controversy in recent months, but it remains a live talking point.
Guaranteed jointly by all the eurozone members, the interest rates for such bonds would be averaged out on rates practised by countries joining the scheme.
That would shield countries facing financial difficulties from speculation and panicked markets demanding exorbitant rates.
But Germany, proud of the low interest it pays due to its strong economic performance and management, has rejected the proposal: it would increase the rates it has to pay to borrow.
Berlin has also argued that the arrangement would make it easier for countries to avoid adopting difficult but necessary fiscal adjustments.
Throughout the debt crisis anlysts have contended that bailouts alone are not sufficient -- that what the eurozone really needs is a thorough overhaul of its operating procedures.
French President Nicholas Sarkozy has lobbied for a form of economic governance that would reduce divergences among member states.
His finance minister, Christine Lagarde, last week told a German newspaper that "an economic government means seeking the approval of other states" before taking action.
But her remarks drew a negative response from German Economy Minister Rainer Bruederle.
Bruedele described the idea as "not a good plan," calling instead for a "permanent protection mechanism for the single currency" and sanctions against eurozone members who fail to exercise budget restraint.
An alternative approach would provide the eurozone with a degree of fiscal federalism, whereby it would have the authority to transfer funds throughout the bloc -- from richer states to poorer partners -- as a means of evening out divergences.
A European federal treasury could also manage tax policies and in that way make the eurozone a true economic union as opposed to simply a monetary union.
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