By Jan Strupczewski
BRUSSELS (Reuters) - European Union leaders will give themselves until June next year to work out how governments can sign contracts to conduct reforms and get some form of EU financial support in return, draft conclusions of an EU summit this week showed on Monday.
The option of legally committing to a reform in exchange for money would apply to euro zone countries, but be open also to non-euro zone members of the 28-nation European Union, the draft conclusions of the December 19-20 summit said.
How exactly the system would work, and, more importantly, where the money in support of the reforms would come from, is to be worked out by the head of the European Commission Jose Manuel Barroso and the summit chairman Herman van Rompuy by June 2014.
The contracts would be for reforms that boost economic growth or create jobs, increase the efficiency of the public sector, help research and innovation, education and vocational training, employment and social inclusion, the conclusions said.
As an incentive to undertake them, the contracts "would include associated solidarity mechanisms offering support, as appropriate, to member states", the draft, seen by Reuters said.
The contracts would be a legally binding agreement between a government, the European Commission and the council of EU ministers, tailored to the needs of each individual country.
"The economic policy measures and reforms included in the contractual arrangements should be designed by the member states, in accordance with their institutional and constitutional arrangements," the draft said.
Once agreed with the Commission and approved by EU ministers, the government would deliver on agreed reform milestones and deadlines for implementation.
The question of how to financially reward such reforms remains open, but once agreed, it would have a legally binding nature, the conclusions said.
"On the associated solidarity mechanisms, work will be carried forward to further explore all options regarding the exact nature (e.g. loans, grants, guarantees), institutional form and volume of support," the draft said.
Leaders note in the conclusions, however, that the financial help cannot not entail financial obligations for countries that do not participate in the system of contracts.
Neither should they become an income equalization tool nor have an impact on the EU's long-term budget, the conclusions said. The financing system should also respect the budgetary sovereignty of countries.
In November EU policy-makers preparing the discussion on the contracts proposed that the financial support could take the form of cheap loans which would be paid out in tranches on reaching reform milestones.
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 subsidized 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.
The November guidelines said 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 did not say what time-frame the loans would be offered for, or what the limit on the size of any loan would be. They could come from the euro zone's rescue fund, the European Stability Mechanism, which raises money on international markets and can on-lend capital to a contracted member state.
The loans would not be available to countries running excessive macroeconomic imbalances or currently under a bailout.
The money could also come from direct contributions of EU or euro zone countries paid into a special fund, or euro zone budget, which could also be filled from a new revenue source, like the financial transaction tax the EU is considering.
(Editing by Alison Williams)