Marco Annunziata, chief economist at UniCredit, is not convinced by the idea of a European Monetary Fund. As he put it in a note on Monday (emphasis ours):
This would be an extremely counterproductive move: it would be an admission of defeat, it would give birth to a redundant regional policy institution at a time when the need for global policy coordination has been amply demonstrated, and it would distract attention from the steps needed to really enforce macroeconomic policy discipline within the eurozone.
The fact that ECB and eurozone officials still protest that the Stability and Growth Pact has been working perfectly well is risible, but jumping to the conclusion that we will never be able to make it work seems extreme. The EMF proposal shows how developments in Greece have brought policymakers to realize that a fundamental overhaul of the eurozone’s institutional setup is needed.
Unfortunately, the EMF is the wrong solution. The eurozone needs stronger and binding mechanisms to effectively enforce fiscal discipline and coordination, which will ultimately require a greater degree of political integration. It would be a huge step, but one that could ensure IMF-style rescues will not be needed. An EMF, instead, would be just a less experienced and likely less effective clone of the IMF, set up in the expectation that crises and rescues will become part and parcel of the eurozone’s life. It would be a needless waste of time and of precious political resources.
Expanding on the themes laid out above, Annunziata makes several additional, thought-provoking points:
…advocating an EMF implies expecting that we will in fact see periodical debt crises within the eurozone. This is an ironic contrast to the current official rhetoric, and it is a stunning admission of defeat, as it sends the message that the eurozone does not believe it will ever be able to set up binding mechanisms to enforce budget discipline…
…if we expect that rescue operations will be needed, why should they not be handled by the International Monetary Fund? What is the rationale for cloning, at a smaller scale, the IMF, an institution that has accumulated decades of experience in dealing with debt crises and in designing and managing macroeconomic adjustment programs? The driving motivation, unfortunately, appears to be regional pride. IMF interventions in support of eurozone members would not be “appropriate”, as ECB President Trichet, put it, because the IMF is an international rather than a European institution, and Europe must show it can solve its problems on its own. I find this rationale completely misguided and lopsided.
Would an EMF do a better job than the IMF at crisis resolution? I really do not believe so. Let us leave aside the issue of technical expertise, which the IMF already possesses and that the EMF would need to duplicate building it from scratch. The IMF enforces compliance with the agreed policy conditionality by threatening the cessation or delay of further disbursements. Political considerations sometimes come into play and can over-ride the IMF staff’s technical assessment, but the broad and diverse structure of the IMF’s Board provides some safeguard. By contrast, the board of an EMF would consist entirely of countries that would suffer from the contagion triggered by instability in one member country, exacerbating the moral hazard problem.
Bottomline: there is no doubt that the existing institutional setup of the eurozone is inadequate and needs to be overhauled; and there is no doubt that changes have to go in the direction of greater fiscal integration, which in turn requires greater political integration. These are the issues on which the policy debate should focus, to build the consensus needed to overcome the enormous and understandable resistance that governments oppose to any further curtailment of national sovereignty. If this quantum leap can be made, the eurozone could finally give teeth to the SGP and ensure effective enforcement of sound policies. There would then be no need for an EMF. If this quantum leap proves impossible, sovereign debt crises may well become a fact of life in the eurozone, but their handling should be left to the IMF, which already has the expertise, the financial resources, and probably a better incentive structure than a purely European institution would have. Setting up an EMF would distract attention from the main underlying problem—namely the lack of binding mechanisms to effectively enforce fiscal discipline, and ultimately the insufficient degree of political integration—and would constitute a needless waste of time and resources.
Full note in the usual place.
Related links:
Why Europe’s monetary union faces its biggest crisis – Wolfgang Schäuble in the FT
Lagarde criticises Berlin policy – FT
Merkel and Sarkozy pledge EU leadership – FT
The Greek boy who cried (no) wolf — and a €25bn bailout – FT Alphaville