By Philip Aldrick

IMF chief Dominique Strauss-Kahn urges leaders to cede more sovereignty to EU

European nations need to cede more of their sovereignty and hand greater powers to the centre to avoid future crises, the head of the International Monetary Fund has said.

In what are likely to prove controversial proposals, Dominique Strauss-Kahn, the IMF managing director, called on the European Union to move responsibility for fiscal discipline and structural reform to a central body that is free from the influences of member states.

In a speech in Frankfurt addressing the sovereign debt crisis engulfing Europe once again, he said: “The wheels of co-operation move too slowly. The centre must seize the initiative in all areas key to reaching the common destiny of the union, especially in financial, economic and social policy. Countries must be willing to cede more authority to the centre.”

Reform is vital but, he said: “The area’s institutions were simply not up to the task of managing a crisis – even setting up a temporary solution proved to be a drawn-out process.

“One [solution] is to shift the main responsibility for enforcement of fiscal discipline and key structural reforms away from the Council. This would minimize the risk of narrow national interests interfering with effective implementation of the common rules.”

Handing greater powers to the centre would lead to a greater loss of sovereignty for each of the eurozone’s member states. Monetary policy is already under the control of the European Central Bank, with national governments holding on to fiscal authority.

In proposals that are likely to play into the hands of eurosceptics in the UK and elsewher, Mr Strauss-Kahn recommended more tax harmonisation and a larger central budget. Reiterating a now common theme, he added that the euro area needs to rebalance – with Germany reducing its dependence on exports and other nations shrinking current account deficits.

To manage and monitor the changes, he argued for a larger central budget – funded by “more transparent EU-wide instruments—such as a European VAT, or carbon taxation and pricing”.

Alongside tighter fiscal controls, he said labour market reforms in the euro area need to be centralised. “The euro area cannot achieve its true potential with a bewildering patchwork of segmented labour markets,” he said.

“These barriers exacerbate the diverging economic fortunes that threaten the euro area today. It is time to create a level playing field for European workers, especially in the area of labour taxation, social benefits systems and portability, and employment protection legislation.”

He added: “The only answer is more cooperation, and greater integration.”

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