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Home > Blogs > Ian Fraser > Greek tragedy’s happy ending—A European Monetary Fund?

Greek tragedy’s happy ending—A European Monetary Fund?

Finance Blogger: Ian Fraser Ian Fraser

The Greek crisis has brought the structural flaws in European Monetary Union (EMU) into sharp relief, as well as weakening the euro and the credibility of the euro. But out of the furnace of the sovereign debt crisis an eminently sensible proposal has emerged.

Instead of unseemly internal bickering over the extent to which richer eurozone states should dig into their pockets to bail out fiscally irresponsible partners, plans are being drawn up for a new institution that should help avert such crises in the future.

The European Monetary Fund (EMF), which would emulate the Washington-based IMF and would be capable of stepping in to assist crisis-hit members of the eurozone such as Greece, recently received public German backing.

On March 7th, the German finance minister Wolfgang Schäuble confirmed plans for an EMF, a scheme that has long been advocated by France. He told Welt am Sonntag: “I am in favor of stronger co-ordination of economic policies in the EU and in the eurozone. We shouldn’t rule anything out, including the creation of a European Monetary Fund (EMF).”

He said he is determined to “present proposals soon” for an EMF that would have “comparable powers of intervention” to the IMF. However he denied any intention for it to rival the IMF, adding: “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.”

Under the current proposals, the EMF would be on standby to support any eurozone member country that was at risk of defaulting on its loans by handing its investors new EMF-backed debt to replace their old bonds. Any financial aid from the new body would be linked to “strict conditions.”

Writing in the Financial Times, Quentin Peel and Scheherazade Daneshkhu said:

“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.”

Dominique Strauss-Khan, managing director of the IMF, seems to be comfortable with the proposals. He said: “It’s perfectly reasonable for Europeans to try to build an institution they need.”

Speaking to Reuters in Nairobi, Strauss-Kahn said the wider European economy was strong. He did not believe IMF involvement would need to go beyond the current levels of technical assistance offered and accepted by Athens. “The eurozone wants to deal with the problem itself and I can understand this. I think they can do it. I hope they will be able to do it, and we’re just here to help. If some more is needed, we will be ready to do it, but so far I think that the Europeans will be able to deal with the problem.”

The Greek debt crisis is the biggest test faced by the eurozone since its creation 11 years ago and has revealed fundamental flaws in EMU, according to some economists.

In a recent paper, Andrew Martin of the Minda de Gunzberg Center for European Policy Studies at Harvard University warned that EMU’s design is “seriously flawed”, given that monetary union was established without political union, which means the single eurozone economy cannot be governed with the combination of macroeconomic policy instruments that modern national governments have. “EMU thus lacks democratic legitimacy as well as the capacity to govern the eurozone economy effectively,” said Martin.

The euro has lost 8% of its value against the dollar in the past month due to fears that a default by Greece might tear the eurozone apart.

The creation of an EMF is probably the step to addressing some of Martin’s concerns and reassuring the bears that the EU is capable of putting in place appropriate structures to ensure monetary union can survive such shocks in future, and is better able to tolerate different growth rates and different fiscal needs.

Further reading for a European Monetary Fund



Tags: EU , European Monetary Union , Greece , international differences , sovereign debt
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