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European Commission raises possibility of full economic integration

The European Commission has suggested that it could seek "full economic union" for member states as part of an "ambitious approach" to strengthen financial stability in the 27-country bloc.08 Jun 2012

Setting out country-specific recommendations to boost growth and create employment, alongside an EU-wide package of measures, the Commission's head Jose Manuel Barroso said that leaders, particularly in the eurozone, agreed that "deeper economic and financial integration" was necessary.

Potential "building blocks" towards this could include a banking union with an integrated system of financial supervision and a single deposit guarantee scheme, to protect savers in the event that a bank goes under.

"We know that some of those decisions cannot be taken immediately, some require also from a legal point of view very important steps," Barroso said in a speech. "But the fact the EU leaders, namely at the euro area level agree on deeper economic and financial integration is a very important signal in terms of the solidity and irreversibility of the euro."

The Commission will seek endorsement of the country-specific recommendations, as well as approval to issue EU-wide project bonds and other proposed economic growth measures, at a meeting with EU heads of state and government next month.

The EU is due to launch its European Stability Mechanism (ESM), a permanent rescue funding programme for troubled banks, as soon as member states representing 90% of the capital commitments which will fund the programme have ratified it - most likely in July. However, the ESM can only lend to governments rather than recapitalise banks directly.

Barroso said that member states had "clearly taken last year's recommendations seriously", with the majority of national deficits falling. However, in-depth reviews of twelve countries showing signs of macroeconomic imbalances - including the UK - showed that more needed to be done to address these imbalances on a more permanent basis. These reviews were carried out as part of the Macroeconomic Imbalance Procedure (IMP), an annual report introduced to prevent and correct potential imbalances, which was implemented for the first time in February.

The more general country-specific recommendations cover a wide range of issues including public finances and structural reforms in areas such as taxation, pensions, public administration, services and labour market issues with particular emphasis on the current "dramatic and unacceptable" levels of youth unemployment. However countries which are currently subject to a previously-agreed economic adjustment programme, including Ireland and Greece, will instead follow those programmes.

"Our recommendations are tailored for each member state, but form part of a coherent approach to rebalancing the European economy," Barroso said. "We have made good progress: public finances are starting to improve and imbalances are beginning to be unwound. The direction is clear. We now need to redouble our efforts, at both the national and European levels, to move faster and further."

In its recommendations for the UK (7-page / 165KB PDF), the Commission said that more had to be done to address "high and volatile house prices" and high levels of debt. It must also further improve the availability of bank and non-bank lending to the private sector, particularly for smaller businesses, and pursue a long-term strategy for improving the capacity and quality of the country's infrastructure with a particular focus on transport and energy.