By Jan Strupczewski and Francesco Guarascio
LUXEMBOURG, June 14 (Reuters) - European Union finance ministers took small steps towards deeper euro zone economic integration on Friday, but they failed to agree on key aspects of a planned euro zone budget, in a blow to French President Emmanuel Macron, who championed the idea.
In 2017, Macron called on the 19 countries that share the euro to create their own budget, worth several percentage points of euro zone output, to help stabilise the economy.
"More work is needed, but today we have taken a number of small steps that, combined, result in real progress," the ministers' chairman, Mario Centeno, told a news conference.
OPTIONS LEFT OPEN FOR LATER
Macron had proposed financing the euro zone budget from the existing EU budget and dedicated new taxes. But the Netherlands opposed the idea of a separate euro zone budget in general, external sources of financing for it except from the EU budget, and using it to stabilise economies.
"As long as this government in the Netherlands is in place, the stabilisation function will not be there," Dutch Finance Ministers Wopke Hoekstra told reporters after the meeting.
The Netherlands, along with other northern European countries, believe stability should be achieved through structural reforms, rather than euro zone budget flows. It praised the budget's focus on investment and reform financing.
Yet, after all-night talks, no option was explicitly excluded. Discussions will continue on the sources of financing, and therefore size, as well as the possibility of using the fund for stabilisation -- a function also backed by the International Monetary Fund.
"No avenue for this budget instrument was closed yesterday," Centeno said. "We did not exclude any dimensions and this is the important thing."
The 27 European Union ministers who took part in the talks agreed on a list of features of the budget that they will present to EU leaders next week.
BEST OUTCOME IN THE CIRCUMSTANCES
The euro zone budget will be part of the wider EU budget and its size will be determined in relation to the EU budget, the Multiannual Financial Framework (MFF).
"We have now reached an agreement on what has to be done," German Finance Minister Olaf Scholz told reporters. "We now have to do the next step in the context of the next MFF."
The euro zone budget would finance investment and reforms, with grants paid out in installments as countries fulfill agreed criteria. Some co-financing would come from national budgets.
"It is the best agreement we could reach with the present state of play in Europe," European Commissioner for Economic and Financial Affairs Pierre Moscovici told the news conference. "We must not forget some ministers were absolutely against the principle of the euro zone budget."
French Finance Minister Bruno Le Maire was more upbeat, downplaying the unresolved issue of the size of the budget.
"The size will depend on decisions that will be taken in the future ... at the beginning it is not of the essence," he told a news conference, adding it could grow in the future.
Le Maire said the euro zone budget would be operational in 2021 when the new long-term EU budget starts, and called it a "game changer" and "a mini-revolution" that would improve the way the euro zone works and enable it to address economic woes.
Many officials believe that even the creation of a small euro zone budget with limited functions was a "foot in the door", enabling the project to grow over time.
DEPOSIT INSURANCE ON ICE, BAILOUT FUND TWEAKS DONE
The ministers also delayed any agreement on the introduction of a euro zone bank deposit insurance scheme (EDIS) because of strong resistance from Germany and its northern European allies.
A working group of senior euro zone officials is to present proposals how to move the discussion forward by December.
Centeno said the ministers had reached a "broad deal" on the reform of the euro zone's rescue fund, the European Stability Mechanism, which would be put in legal form over the next six months and ratified by euro zone governments next year.
The reform includes easier access to precautionary credit from the ESM for countries facing market difficulties and an agreement between the Commission and the ESM on how to establish whether a country's debt is sustainable.
It also includes introducing "single-limb" collective action clauses for euro zone bonds. Such clauses mean a single restructuring decision would apply to any given bond, making it less likely restructuring of sovereign debt would be obstructed by hold-outs.