UPDATE 1-ECB’s Mersch says euro zone fund could be broadened

* Mersch: reforms better step-by-step

* Mersch: joint euro zone bonds would require common taxes

* Mersch backs strict fiscal policies

(Updates with quotes, background)

By Ben Deighton

LUXEMBOURG, Dec 10 (BestGrowthStock) – Expanding Europe’s financial
stability fund would be preferable to issuing euro area bonds in
the short term to tackle any debt problems, European Central
Bank Governing Council member Yves Mersch said on Friday.

“We have already an EU financial stability fund, and why not
allow this existing fund to broaden the scope of its
activities?” he said after presenting the twice-yearly bulletin
of Luxembourg’s central bank, of which he is governor.

The International Monetary Fund and some euro zone finance
ministers have suggested that the currency area’s 750 billion
euro ($989.9 billion) stability mechanism should be increased to
ward off a debt crisis, but Germany has rejected the idea.

Berlin, the euro zone’s political and economic powerhouse,
has also rebuffed a call from Italy and Luxembourg for the
single currency area to issue common bonds.

Speaking about such bonds, Mersch said it would be better to
take reforms one step at a time, and added that if the euro zone
decided to issue debt, it might also need to play a fiscal role.

“I think in this country we are used to making one step
after another. Sometimes it is not helpful if you take the third
step before taking the first.”

“If you want to Europeanise European debt, you have to
Europeanise European tax collection,” he added.

However, the prospects for common euro zone or EU taxes seem
dim, with many countries refusing even to consider working on
harmonising taxes, analysts and politicians say.

Mersch urged EU governments to adopt strict, automatic
budget discipline rules as part of the reform being discussed to
prevent budget deficit overshoots such as that of Greece, which
sparked investor worry about the stability of the euro zone.

Structural, growth-boosting reforms are also needed, he

“Do not forget that debt is tax of tomorrow if we do not do
the necessary reforms to increase potential growth…”

He also urged politicians to avoid comments that may
destabilise financial markets.

Some analyst have said EU leaders have bungled communication
with investors, increasing the possibility that Ireland’s
financial woes will spread to Portugal and Spain.

“Concerning the question of a spillover effect, I am still
disturbed by the amount of uncertainly that is created in the
markets by focusing on unhelpful comments which prevent the
markets from focusing on the real situation in some
countries…,” he added.
(Reporting by Ben Deighton, writing by Marcin Grajewski,
editing by Rex Merrifield and Luke Baker)

UPDATE 1-ECB’s Mersch says euro zone fund could be broadened