/LUXEMBOURG (Reuters) - EU policymakers injected a dose of cold reality into talk of creating a European monetary fund, questioning who would pay for it and saying the principle of no bailouts for countries in financial trouble must stay.
Eurogroup Chairman Jean-Claude Juncker said on Thursday such a fund should protect only the interests of the entire euro zone, not any individual member of the currency bloc, while ECB Governing Council member Yves Mersch said central banks weren't in the business of budget bailouts.
With Greece battling a debt crisis, German politicians in particular have pushed the idea of a new rescue fund which euro zones countries could tap if they faced insolvency.
But Juncker and Mersch, both Luxembourgers, made clear many practical problems had to be overcome if the idea were ever to become reality.
Juncker, who speaks for euro zone finance ministers, said the principle that no member state could be bailed out by others if it ran into budget problems was sacrosanct. This was enshrined in a clause of the Maastricht Treaty which created the common currency.
"What is planned with the creation of the European Monetary Fund -- and there are thousands of questions to clarify -- is not a skirting around of the no-bailout clause," he told Germany's NDR radio.
"It would not be an instrument for Greek-style (bailout) solutions, were this to be necessary, but a somewhat broader instrument that would protect the entire euro zone, not only one country," he said in a telephone interview.
Athens is facing a potentially overwhelming budget crises. It recently agreed an austerity plan to reduce this year's deficit to 8.7 percent of GDP from a towering 12.7 percent in 2009.
Greeks have already taken to the streets in violent protests but the government will have to make similarly painful cuts for several years if it is to have any hope of reaching the European Union's deficit ceiling of three percent.
A LOT OF FANTASY
Mersch made clear that the European Central Bank would not provide emergency funding for countries in a budget crisis. He also appeared to doubt whether euro zone citizens would want their governments to stump up the capital for a monetary fund.
"I do not see any place for central bank money to bail out fiscal deficits. If there would be taxpayers' money I would have no comment because it would not be my business," said Mersch, who heads Luxembourg's central bank.
"When there is no money there is always a lot of fantasy," he told a news conference. "We must be careful not to think that it is too easy to make policy with other people's money. I would like to hear what are the funding needs of such developments.
"Each country remains responsible for its own internal equilibria. The monetary framework does not intend taking over this responsibility."
On Wednesday, ECB President Jean-Claude Trichet did not dismiss the idea in principle but said bank policymakers would need to look at the proposal in more depth.
Trichet said calling such a fund the European Monetary Fund would not necessarily accurately reflect its role, which he saw as providing financial help with strict conditions.
Juncker said euro zone finance ministers should step up its surveillance of countries' finances. "We must expand our monitoring mechanisms in the Eurogroup," he said, noting that Greece had steadily lost its competitive edge since joining the euro zone.
"Differences in competitiveness between countries in the euro zone were never a real problem," he said. However, these gaps could have a greater effect in future.
The Eurogroup would discuss this next Monday. "We will adopt country-specific recommendations so that countries, should they drift apart in competitiveness, can find their way back to the path of virtue."
German Finance Minister Wolfgang Schaeuble backed the idea of an EMF in a weekend interview and Chancellor Angela Merkel has also given a degree of support. But Germany's two representatives on the ECB's Governing Council are less enthusiastic.
(Writing by David Stamp; Editing by John Stonestreet)
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