A European Monetary Fund? Why, Just Ditch IMF

♠ Posted by Emmanuel in , at 3/08/2010 12:01:00 AM
It sort of defeats the purpose of having a multilateral lender of last resort if every region in the world is going to have one of their own. Each has its own rhyme and reason: Back in 2000, ASEAN+3 countries (the ASEAN ten plus China, Japan, and South Korea) established the Chiang Mai Initiative of bilateral swaps. This, of course, has since been replaced by the Chiang Mai Initiative Multilateralization (CMIM) which is a pool of funds instead of a series of bilateral swaps. Although there are still kinks to be ironed out with CMIM such as still relying on the IMF for performing surveillance functions, its general idea is that bountiful reserves in East Asia can be used to help neighbours in need during balance of payments crises instead of having them resort to harsh IMF conditionalities made infamous during the Asian financial crisis.

Now we have news that the Europeans are having their me-too moment in light of Greece's woes. In their case, the rationale is somewhat different but the conclusion Eurocrats are increasingly agreeing on is that, yes, there needs to be a European Monetary Fund. From what I can gather, its purposes are twofold. First, it will centralize surveillance functions on wayward states that continuously violate the Stability and Growth Pact conditions of not running a fiscal deficit of more than 3% and having more public debt than 60% of GDP. Second, insofar as market participants are jittery of what signals IMF lending to Eurozone member states would mean for the fate of the single market, it would be better if the EU had its own emergency lender. (Remember again that it's not primarily BOP crises the Eurozone has to deal with.) Here's a sketch of the details from the FT:
Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials. Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece.

The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed at the weekend by Wolfgang Schäuble, the German finance minister. “I am in favour of stronger co-ordination of economic policies in the EU and in the eurozone,” Mr Schäuble told news-paper Welt am Sonntag.

If France and Germany can agree on such proposals – long urged by Paris – they are likely to set the basis for the most radical overhaul of the rules underpinning the euro since the currency was launched in 1999...“We must support Greece, because they are making an effort,” Mr Sarkozy said before the meeting. “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro...”

Both France and Germany agree Greece should not turn to the IMF for support, so the idea of an EMF has clear attractions for Paris, though it could hardly be set up in time to help Greece. Mr Schäuble said: “We are not planning a competitor...to the IMF, but we do need an institution for the internal equilibrium of the eurozone that would have at its disposal both the experience of the IMF, and comparable intervention mechanisms.”

According to German thinking, the plan could include tough penalties for eurozone members that fail to curb deficit spending or run up excessive government debt. Ideas include cutting off countries that fail to curb deficit spending from EU cohesion funds, temporarily removing their right to vote in EU ministerial meetings and suspension from the eurozone. Those may prove very difficult for France to swallow, given its own record of greater fiscal laxity than Germany.
UPDATE: Brussels' executive body, the European Commission, appears to concur with the suggestion about creating an EMF. Strangely enough from my POV, left-leaning Euro parliamentarians are backing this proposal since they see it reducing speculative pressures on the EU. Still, there are Big Brother-ish elements to monitoring that they may not entirely agree with:
The European Commission on Monday signalled its willingness to swing into action with a plan for a monetary fund equipped with sufficient resources to assist highly indebted eurozone nations such as Greece. Commission officials said preliminary work was already in progress and a proposal for a European Monetary Fund could be prepared by June, when EU heads of state and government are due to meet for a summit.

Antonio Tajani, the EU’s industry commissioner, said he and his colleagues were likely to have their first discussion of the plan at a regular weekly meeting of the Commission on Tuesday in Strasbourg. The creation of a European Monetary Fund would mark a significant step forward in the integration of the eurozone economy, which for the past 11 years has had a single currency and a common central bank but has lacked a fiscal union and clear-cut arrangements for assisting a member-state in severe financial difficulty...

Support for a European fund has come from Europe’s socialist parties, the second largest political group in the European parliament, which have proposed the creation of a “European mechanism for financial stability”, consisting of a trustee fund that would bring together the 16 eurozone governments and would be free to borrow on capital markets. The socialists said their proposal would not involve “any transfer of funds from member-states to their partners” and would be intended merely “to ensure that speculative attacks on sovereign debts in the euro area will quickly become a thing of the past”...

Enforcement of stricter fiscal discipline in return for the establishment of a European monetary fund would risk running into other political obstacles. Although the EU’s stability and growth pact – the eurozone’s fiscal rulebook – already permits a country to be fined for persistent mismanagement of the public finances, governments have in practice avoided imposing such a punishment on one of their number for fear that the tables might one day be turned on themselves.