A European Monetary Fund could be up and running as early as 2019, and it would be likely to become as much partner as competitor of its global counterpart in helping governments in fiscal crisis, the International Monetary Fund. According to a number of European officials, who spoke to Handelsblatt Global off the record, turning the existing European Stability Mechanism into the EMF would be a step towards the 19 euro zone countries pooling their stakes in the Washington-based institution, which would see the currency bloc leapfrog the US to become its largest shareholder.
As so often in the European Union, what its politicians – by design or accident – tout as a radical departure is more evolution than revolution. Since 2010, the euro zone has had a backstop to help member governments in fiscal crisis – five so far, in return for political reforms. The European Financial Stability Facility (EFSF) was set up after a messy ad-hoc rescue of Greece helped trigger further crises in Ireland, Portugal and beyond; it morphed into the European Stability Mechanism (ESM) in late 2012.
The idea that it’s time for yet another incarnation of the euro zone’s government-rescue fund has gained traction in recent months, especially after German Finance Minister Wolfgang Schäuble in March suggested the creation of an EMF. In May his boss, Chancellor Angela Merkel, and the new French president, Emmanuel Macron, vowed new measures to strengthen a Brexit-battered EU and a euro zone still chafing from sovereign-debt crises.
Mr. Schäuble’s call came as euro zone officials wrestled to keep the IMF committed to the ESM’s last (and longest) assistance program, that for Greece, to which the IMF has lent technical support and substantial – if ever-decreasing – funding since 2010. The wrangling highlighted the ESM’s increasingly fraught reliance on outsourcing program design and surveillance to the IMF, the European Commission, and the European Central Bank (ECB) – the “Troika” so hated in Greece for its budgetary rigor.
But, as so often in the European Union, the same buzzword has since come to mean different things to different people. For Mr. Schäuble, an EMF should be an über-IMF, combining financial firepower with expertise in designing reform programs, and taking over budgetary oversight of all EU countries from the European Commission. For others, like Spanish Finance Minister Luis de Guindos, an EMF could be something more akin to a “European treasury” that would provide essentially no-strings funding to member countries whose economic growth was found to be lagging.
Interestingly, these differences echo the founding of the IMF at the Bretton Woods Conference. According to an IMF paper by historian James M. Boughton, the US in 1944 pushed through its idea of an institution “that would allocate its resources selectively” in opposition to the UK’s proposal, penned by John Maynard Keynes, for one that would make funding “freely available to members on demand.” Ms. Merkel and Mr. Macron will have to get all European counterparts to agree on one sole mandate.
The Keynesian proposal corresponds to a staple of French policy: a call for a centralized European “economic government”, with one pan-European finance minister in charge of large, new fiscal transfers. Nonetheless, European officials say that Mr. Macron and his finance minister, Bruno Le Maire, are leaning towards a more German definition: the EMF as a bastion of budgetary rigor, not a fount of billions for investment in member states.
They are doing this safe in the knowledge that Mr. Schäuble’s über-EMF is widely considered unworkable, as it would need changes to the EU Treaty and ratification by all 28 member states. Ms. Merkel and Mr. Macron have said that they would change the EU Treaty if necessary, but officials say a handful of countries have warned that getting national approval would be hard or impossible. Lesser changes in EU secondary law seem most likely.
As a result, EU officials reckon that most of the EU’s budgetary surveillance will remain unchanged. The European Commission will keep budgetary oversight, with the EMF getting new powers to oversee member states upon signs of fiscal trouble. Future rescue programs would as a result not be run by the EMF on its own, but only in conjunction with the Commission.
Mr. Macron also is getting German backing for creating more EU funds elsewhere. After a meeting of the French and German cabinets on Thursday in Paris, Ms. Merkel again called for the creation of a “fiscal capacity” that could provide individual member states with a new source for funding investments. One top of that, ESM chief executive Klaus Regling last week used a Handelsblatt interview to call for the creation of a “rainy-day fund” to help member states suffering from external economic shocks – the sort Ireland might suffer after a “hard” Brexit, officials say.
Whether member states agree on either or both of these proposals remains to be seen. Officials expect Ms. Merkel and Mr. Macron to unveil their joint plan after the German national election at the end of September, which Ms. Merkel is widely expected to win. Both could use the momentum of their new mandates to forge a pan-European agreement by late 2018. That would allow the EMF to start work a some point during the following year.
How the EMF would affect the work of the IMF would depend on reactions on both sides of the Atlantic. The euro zone’s sovereign backstop is only one of around half a dozen “regional financial arrangements” to be founded, or beefed up, in recent years. The IMF would best see them as partners rather than rivals, European officials say. For its part, the euro zone could pool its IMF stakes so that only one fiscal-policy representative sits alongside the ECB president on the IMF’s executive board. Together, the euro zone states would hold 21.5 percent of IMF shares, five points more than the US. “Logically, the euro zone will at some point pool its shareholdings,” says Daniel Gros at the Centre for European Policy Studies (CEPS) in Brussels. But he adds national rivalries in the euro zone make this unlikely any time soon.