Home > Uncategorized > The EMF: A European Affair

The EMF: A European Affair

cartoon from the Economist

The Greek financial crisis has borne some interesting discussions. We have a new catchy acronym, PIIGS (Portugal, Ireland, Italy, Greece & Spain-  eurozone countries with worrying amounts of debt), questions about the stability of the euro, another excuse to bash Goldman Sachs and a further fracturing between fiscally conservative and debt-ridden EU members. The most interesting result of the crisis, although I love hearing about the pigs, is about the creation of another acronym, the EMF, a European version of the International Monetary Fund. While the idea has merit, it runs counter to a clause in the European Monetary Union’s treaty, forbidding the bailout of economies in the eurozone.

Although details about a fund proposal remain opaque, the status quo is desperate enough to justify an extreme change. The idea for a monetary fund first came from Germany, which is interesting considering Germany’s unwillingness to bail out its fellow members’ profligacy. Germany may see the fund as a tool to maintain more control and better oversight over members’ debt and finances. Since accepting assistance from the IMF has proved unpalatable to the EMU, a European monetary fund could be a viable solution. Problem is, a monetary fund would have to have teeth to make any real difference. The eurozone pact had limits in place on government debt, 60% of GDP for total debt and 3% of GDP. These limits have been exceeded many times by many countries. Either they are unrealistic or must be enforced more strictly.

The EMU’s mistrust of the IMF is not baseless. A European Monetary Fund could foster better cooperation among the eurozone economies, while maintaining better oversight and compliance over government fiscal policies. Instead of treating Germany and France like a pseudo-monetary fund, the EU should create its own monetary fund. Of course, none of this matters for Greece now. By the time a monetary fund is officially up and running, the Greek crisis will be resolved one way or another. But for the future, a European monetary fund could save a lot of in-family fighting and allow Germany to hand in its “bad-cop” uniform.

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