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European heavyweights show support for European Monetary Fund


Latest update : 2010-03-09

The European Commission and Eurozone heavyweight Germany have backed the idea of a European Monetary Fund (EMF) that would help mediate future economic crises in the 16-member euro currency zone and avoid a repeat of the current situation in Greece.

REUTERS - The European Commission and euro zone heavyweight Germany have voiced support for the creation of some kind of European Monetary Fund (EMF) to help the 16-nation currency bloc prevent and tackle future fiscal crises.
The idea of such a fund was revived earlier this month by Thomas Mayer, chief economist at Deutsche Bank, and Daniel Gros of the Brussels-based Centre for European Policy Studies (CEPS), in response to the financial woes of Greece.
The fund they propose would have three main goals -- surveillance of euro zone economies independent from political influence, management of crises within the currency bloc and a mechanism allowing for the orderly default of a member state.
Although momentum has grown in recent days, with German Chancellor Angela Merkel cautiously backing the idea on Monday, it faces daunting political hurdles and would likely take many months or years to set up.
Below are some key questions and answers on the European fund, which would be loosely modelled on the Washington-based International Monetary Fund:
Would such a fund help Greece?
The short answer is no. The idea is to give the euro zone the tools to ward off future crises and a framework for dealing with them if and when they arise. The complexity of setting up a European fund means it would almost certainly come too late for Greece, which is looking for immediate solutions to help reduce borrowing costs on its debt mountain.
What hurdles must be overcome?
TREATY CHANGE - Perhaps the biggest hurdle to the creation of an EMF would be if it required changes to the EU's Lisbon Treaty. Gros and Mayer say the fund could be pushed through without treaty changes under provisions for "enhanced cooperation" among groups of member states, but Merkel said on Monday that a treaty change was probably necessary.
Amending the treaty would require unanimous agreement of the broader 27-nation EU, including ratification by parliamentary vote or referendum in all member states. As the agonising process of approving Lisbon showed, this could hit roadblocks in any member state and take years to push through.
Since the current treaty contains a "no bailout" clause, the creation of a fund to help member states in need could also be challenged in court by opponents, further delaying the process.
FUNDING - Another important hurdle would be agreement within the euro zone on how an EMF would be funded.
In their proposal, Gros and Mayer say the fund could issue a bond, backed by euro zone members, to provide start-up funding. Politicians in Berlin have long resisted that because they fear it could tarnish investor sentiment towards their own sovereign debt issues, the low-yield benchmark within the euro zone.
In the longer term, the authors advocate making euro zone countries contribute annually to the fund in proportion to the excess of their debt and deficit over limits set out in the Stability Pact. That would put the biggest burden on heavily indebted countries and be costly for core members France, Italy and Belgium.
The history of the pact shows that the idea of penalty payments from debt and deficit violators would be politically difficult if not impossible. Germany and France watered down the terms of the pact in 2005 to avoid the risk of having to pay penalties themselves.
In addition to the funding dilemma, Germany could insist that countries participating in the fund agree not to pursue IMF assistance due to fears that could open the door to interference in euro zone affairs by big IMF members like the United States and China. Other euro members might want to keep the door open to IMF assistance, since they pay IMF dues.
ECB RESISTANCE - The ECB, which closely scrutinises the euro zone economy and the fiscal policies of its members itself, could see the fund as infringing on its own work and violating the spirit of the currency bloc.
ECB executive board member Juergen Stark signalled his opposition to the idea on Monday, saying such a fund would be incompatible with the principles of monetary union, penalise countries with solid finances and encourage profligacy in weaker states. He advocated strengthening the Stability Pact instead.
Why does Germany support the idea?
Germany has insisted that the EU's existing fiscal discipline rules remain important and relevant, and that the crisis in the euro zone resulted largely from members such as Greece ignoring debt and deficit limits set out in the pact.
But Berlin has gradually come around to the view that the pact is deficient in enforcing fiscal discipline among euro members and sees the EMF as a way to tighten the screws.
The idea of financing the fund with penalty payments imposed on euro member states which violate the Stability Pact is attractive to Berlin because it could sell this to a German public deeply opposed to any bailout.
On top of these penalty payments, German media reports have indicated Berlin would like to withhold EU cohesion funds from countries that fail to respect debt and deficit rules, and even temporarily suspend EU voting rights of serious violators. It is not clear that France would support such sanctions.
Another attraction for Berlin is that such a fund could alleviate future pressure on it to bail out fellow euro states -- by deterring speculative attacks, giving members a bigger incentive to keep their finances in order, and spelling out clear procedures for an orderly default by a euro country.
Where would a fund leave existing institutions?
EU - Because the fund would likely be designed for euro zone states only, it would create a further division between the 16-member currency bloc and the broader EU. This divide could widen if a non-euro EU member ran into financial trouble and was unable to go to the fund for support.
EUROPEAN COMMISSION - The fund would be designed to complement and strengthen rather than replace the EU's Stability and Growth Pact, which has been widely breached with impunity. Under the Gros and Mayer proposal, the fund would effectively enforce the pact's rules. It would have a two-tier structure -- an independent staff conducting economic surveillance and a board consisting of euro member states. That could undermine the European Commission's budget surveillance powers and weaken its influence over EU fiscal and economic policy.
ECB - Reconciling the surveillance work of the fund with the economic monitoring of the European Central Bank could prove difficult. In an ideal world, the institutions would work closely together but the ECB could see such collaboration as an unacceptable violation of its independence.
IMF - European countries and the United States strongly resisted a proposal from Japan in 1997 to create an Asian Monetary Fund to cope with the Asian financial crisis because they said this would unnecessarily replicate the work of the IMF. Now Europe is mulling a similar idea. Creating an alternative financial aid mechanism for euro zone states, and possibly the broader EU, could end up weakening the IMF.


Date created : 2010-03-09

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