Schäuble proposes European Monetary Fund

 

It’s happening. European government are sufficiently scared that they produce some governance reform ideas. Germany’s Wolfgang Schauble has picked up on Daniel Gros and Thomas Mayer’s idea of a European Monetary Fund.

The first details were revealed by the German finance minister Wolfgang Schäuble, who  told the Welt am Sontag that the eurozone needs a European IMF and that he will make concrete proposal soon. Schäuble, incidentally, also said that support for Greece would not necessarily contradict the bail out clause in the Maastricht Treaty as the measures were intended to prevent financial instability of the eurozone as a whole.   

FT Deutschland has some more details. The plan proposes liquidity support for countries under financial difficulties under strict conditions. Whether help is granted, or not, would be decided by unanimity of the eurogroup  under exclusion of the respective country. Insolvency should not be excluded per se. Members would be obliged not to call for help of the IMF.

Preemptive measures include tougher rules for the Stability and Growth Pact.  Ideas include cutting off countries that fail to curb deficit spending from EU cohesion funds, temporarily removing their right to vote in EU ministerial meetings and suspension from the eurozone. Also included are much more intrusive economic surveillance, and even management, for those economies that fail the rules of the EU stability and growth pact.

Schäuble´s proposal finds support across party lines in Germany, reports Spiegel Online. It is supported by the EU Commission. Greek central bank governor Georgios Provopoulos meanwhile is sceptical. He told FT Deutschland that respect of the current Stability Pact and consequential consolidation would make such a proposal unnecessary.

 In the FT Quentin Peel notes that such an arrangement could hardly be set up in time to help Greece as this would require treaty change.  The changes would amount to easily the most radical overhaul of the Maastricht Treaty (and let’s recall how long it took for the Constitutional/Lisbon Treaty to be negotiated and ratified.

 

Other institutional options have also been put forward:

Jean Claude Juncker suggested on Friday to create a European rating agency under the supervision of the ECB, as a counterbalance for the private Ango-Saxon rating agencies, reports Les Echos.

Belgian prime minister Yves Leterme suggested in the FT Deutschland and Le Monde a common treasury or European debt agency.   This institution would issue and mangage the debt of eurozone countries.

 

Support for Greece

Lukewarm in Germany

After meeting the Greek prime minister George Papandreou, Angela Merkel told the press that the question of a bailout “absolutely doesn´t arise” .

 

Strong words in France

Strongest support for Greece showed Nicolas Sarkozy, who said the eurozone is ready to rescue Greece should the government struggle to fund its deficit. “We must support Greece, because they are making an effort,” Sarkozy called on the solidarity of eurozone members saying that: “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.” For further sound bites see Le Monde.

George Papandreou said all his county expects is to borrow at similar or identical rates as other eurozone countries, Les Echos quotes.

 

Greek wage cut programme could provoke recession

An article in Kathimerini breaks down in more details what is behind the €4.8bn saving package including a long list of wage and pension cuts that awaits the public sector.  The article goes on arguing that such austerity measures risk causing a recession. Better would be to complement the austerity programme with growth stimulating measures.

 

Volcker believes in euro survival

Paul Volcker is confident that the euro will survive the first major crisis, according to Bloomberg. A “combination of very strong measures and availability of money” may help solve the Greek problem and stop contagion spreading to other euro nations, he said on a lecture in Berlin.

 

Munchau on why the euro is likely to fall

In his FT column, Wolfgang Munchau argues the case why the euro has further to fall. He makes a sectoral balances arguments, the result of the strong commitment by the EU to consolidate budgets, down to 3% of GDP, or in Germany’s case beyond. The consequences will be either a deterioration in private balances – which in the case of southern European countries could be quite dramatic – or an improvement in the current account balances. The first would imply, the latter require a weaker euro.

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