Germany’s finance minister first put the proposal on the table seven years ago: “Euro zone members could also be granted emergency liquidity aid from a ‘European monetary fund’ to reduce the risk of defaults,” Wolfgang Schäuble wrote on March 11, 2010, in the Financial Times. “A good and interesting idea,” Chancellor Angela Merkel quickly responded.
The idea was born out of necessity: In order to save the euro, the currency union had to rescue its member Greece from going bankrupt. In the end, Mr. Merkel decided upon another, smaller solution: the European Stability Mechanism (ESM), popularly known as the euro zone’s bailout fund, was born. It became Greece’s largest creditor by far.
For a long time, there was no further talk of a European Monetary Fund – until the start of this year, when Mr. Schäuble suddenly revived it. The long-time member of Ms. Merkel’s Christian Democratic party is now calling for turning the ESM into a European Monetary Fund, or EMF – and the chancellor is once again covering his back.
Without a new, powerful institution leading the way, the euro zone simply might not be able to offer assistance to its third-largest member country.
But the focus, this time, is no longer on Greece but on another euro country: With its ailing banks, debt-ridden Italy could have difficulties raising money from financial markets if the European Central Bank begins raising interest rates. That time is coming soon, because inflation is clearly accelerating.
Without a new, powerful institution leading the way, the euro zone simply might not be able to offer assistance to its third-largest member country, which has debts amounting to €2 trillion – especially because Italy can’t and doesn’t want to have further recourse to the International Monetary Fund, or IMF. The fact that the IMF will no longer be involved in future rescue programs for euro-zone countries in crisis has already been decided and announced.
So the European Stability Mechanism needs to be strengthened – both financially and politically. There are strong indications that Germany and France will take on this task together once elections have been held and new governments are in office in both countries. That will be the case at the beginning of 2018 at the latest.
None of this will happen, of course, if Marine Le Pen wins in France. The head of the National Front rejects both the euro and the European Union. But the two most promising, pro-European presidential candidates in France have already spoken out in favor of a European Monetary Fund.
Already in 2010 during a visit to Berlin, then-French prime minister François Fillon said: “There is no alternative to an EMF.” And in June 2016 Emmanuel Macron, together with Germany’s then economics minister, Sigmar Gabriel, proposed that the ESM “be transformed into a European Monetary Fund.”
In other words, there is already a fundamental agreement between Berlin and Paris about the EMF as a concept – just not about its competencies. On the latter, there are widely divergent viewpoints.
When the E.U. executive declared itself to be a “political” commission and applied the budget rules of the stability pact “flexibly,” it lost credibility in Berlin and authority in Rome.
Mr. Schäuble hopes the fund will monitor the budgetary discipline of euro countries and impose unswerving penalties on violations of E.U. budget requirements. Up to now, the European Commission has carried this responsibility.
By contrast, France has long been proposing that the euro zone be provided with a budget for helping individual member states faced with economic shocks. That sort of budget could be set up with the EMF. Martin Schulz, the Social Democratic candidate for Germany’s chancellorship in September elections, wouldn’t have a problem with that. And Angela Merkel, if she wins one more time, would likely have to move toward the French position on this issue. German-French reform initiatives for the euro zone only come to pass when both sides make compromises.
The new EMF could also include insolvency regulations in the event that euro zone countries do have to default, something the German central bank, the Bundesbank, has called for. Moreover, it is conceivable that the ESM’s total credit volumes for countries in crisis, currently totaling €800 billion, could be raised.
In 2010, when the idea of a European Monetary Fund was first discussed, the European Commission was also in favor of it. That is no longer the case. It fears a loss of influence and competencies – and rightly so. In the medium term, the EMF could become a new center of power – at the expense of the commission.
If the EMF does come to pass, the E.U. executive should consider itself partly responsible: When it declared itself to be a “political” commission and applied the budget rules of the stability pact “flexibly,” it lost credibility in Berlin and authority in Rome.
For this reason as well, Italy is now following Greece in becoming a difficult problem for the monetary union. The country with the second-highest debt load in the euro zone used the period of low interest rates neither to consolidate its budget nor to push through far-reaching structural reforms. This compels the euro zone to draw the appropriate conclusions.
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