March 27, 2018
The IMF's proposals for eurozone reform
There are, broadly speaking, four schools of though for eurozone reforms:
- The liquidationist view - help in return for automatic debt restructuring, and the possibility of a euro exit;
- re-nationalisation of fiscal policy;
- a single safe asset - real, not securitised;
- a central fiscal capacity and further development of existing infrastructure;
Then there is a lot of muddled thinking - like securitised safe assets - and various cross-sections between the four schools of thought above. We favour the single asset approach - number three. The direction most likely to be pursued is some compromise between numbers 1 and 4. The IMF is clearly in the camp of those, like Emmanuel Macron, who is seeking a fiscal union as the main pillar of reform. Christine Lagarde noted that fiscal policy during the eurozone crisis was highly pro-cyclical and produced a double-dip recession. A central fiscal capacity would mitigate, though not eliminate, the effects of a crisis. The IMF proposes a rainy-day fund, with borrowing capacity but with an obligation to repay all debt. With a contribution of 0.35% of GDP it would be possible to reduce the negative effect of a hypothetical severe crisis by some 0.5pp, as outlined in a specific case study. This is intended as a compromise. Lagarde said this is not going to solve the next crisis, but it will help. She said there are legitimate fears that this could lead to a transfer union - she was speaking in Berlin - but the fund could be constructed in such a way as to avoid this problem. The principle of eurozone reform should be not to make the good the enemy of the best.
In its coverage of the story, FAZ immediately calculated that Germany would have to pay some €11.4bn into this fund, which is about the same as the financial room for manoeuvre for the entire four-year term of the grand coalition. It is no surprise that this proposal did not meet with much enthusiasm from various German politicians and economists quoted in the article.