Q+A – Europe mulls monetary fund to prevent euro crises

By Noah Barkin

BERLIN, March 9 (BestGrowthStock) – 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.

Investment Advice

(Writing by Noah Barkin, editing by Paul Taylor)

Q+A – Europe mulls monetary fund to prevent euro crises