We’ve already got in the pop band references, so let’s be serious for a moment. FT Alphaville is still scratching its head over how the proposed European Monetary Fund would work.
We’re not alone. Angela Merkel has already urged caution on the Fund, saying it would require “a new treaty and the agreement of all European Union member states”, according to an FT story. Bundesbank head Axel Weber blew even cooler on Tuesday.
Not coincidentally, Weber is a board member of the European Central Bank – and FT Alphaville’s main problem has been working out what the EMF could do for the next stage of Europe’s crisis that the ECB can’t.
Indeed, we doubt anyone sought out the ECB before the EMF was proposed at the weekend. From Tuesday’s (German-language) Handelsblatt, translation ours:
[Juergen Stark,] the ECB’s chief economist has countered both Finance Minister Wolfgang Schäuble, who spoke out at the weekend in favour of the principle of an ‘EMF’, and the EU Commission, which welcomed the idea yesterday.
It risks a conflict between the independent central bank and politics which would burden the euro zone in cases such as Greece’s recent high indebtedness. A monetary fund would be the start of a system of European financial compensation that could ‘be very expensive.’
Fiscally sloppy countries ‘would not change their behavior’, warns Stark. He fears that even ‘the public acceptance of the euro and the European Union would be undermined.’
(FT Money Supply has more on Stark and the ECB’s internal politics over the EMF).
Surely it was rather important to get the ECB on board? After all, the Bank played a huge role in the Greek crisis. Its blessing of Greece’s austerity plan appears to have given the green light to last week’s bond issue.
Moreover, the Bank’s liquidity exit strategy has already begun, and will influence European post-crisis decision-making. It’s hard to see the new Fund exerting that pull on markets.
Score one to the ECB, then.
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The question of funding
FT Alphaville would also like some details on how the EMF will actually raise money, please. This nugget from the FT’s write-up offers one hint:
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”.
Which is rather far from the IMF model of member subscriptions. Those are calculated according to special quotas varying from member to member. ‘Pretty expensive’, in Stark’s words, but it makes inter-state transfers a piece of cake for funding IMF loans to weaker members.
Neither the Maastricht nor Lisbon Treaties technically allow for similar transfers, of course. Hence the vagueness over how this Fund would, er, fund itself. Lex, for one, has mulled the idea for the EMF to get by on borrowing initially, followed by mandatory subscription by eurozone states which break their deficit allowance.
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A solution to the wrong problem?
Even then, it’s hard to shake the sense that the EMF is a solution looking for the wrong problem. Consider the alternative that Carmen Reinhart outlined in an Economist roundtable on an earlier, wonk-inspired EMF proposal (our emphases):
The feature that is more promising of the Gros and Mayer proposal is one with a narrower mandate – a regional sovereign bankruptcy court. On that score, the regional institution would be filling a gap in the existing financial architecture. I would actually ask of the authors that they expand their proposal beyond the sovereign to consider what role the new institution could play in sorting out the messy blur that currently exists between public and private debts: the “quasi-sovereigns” for lack of a better term. Clearly Greece’s and Portugal’s problems are in the sphere of sovereign debt but Europe’s debt problems going forward importantly involve the orderly workout of massive private debts (Ireland, Spain and the UK are not alone on this score).
Who might need such a bankruptcy court? Well, we couldn’t possibly say, but it might come in handy compared to the relative risks of sovereign defaults and austerity plans. Hmm – the tricky task of draining liquidity while allowing debts to be worked out. Again, that looks like a job for the ECB, not the EMF.
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European (dis)union
That’s not all. According to Tyler Cowen, there’s also still scope for crisis-proofing our favourite fiscal Eurogrump:
A large part of the European dilemma stems from the charter of the European Central Bank. The Bank is constrained to pursue price stability and price stability only. This is in large part because Eurozone member nations do not trust each other, the Germans do not trust majority rule, and EU institutions are not very good at renegotiation on the fly. Compare all of this to Fed-Treasury coordination during the U.S. financial crisis and the differences are huge. Arguably the ECB should be doing much more to help Europe through its widening financial crisis, but it’s simply not up to the task.
Discuss, Juergen.
Related links:
EMF: You’re unbelievable – FT Alphaville
The European exit strategy, revisited – FT Alphaville
ECB’s Stark rebuffs European rescue fund idea – Reuters
Why Europe needs its own IMF – FT