What flesh will be put on the bones of an EMF?
In the space of a few weeks, the idea of creating a European Monetary Fund to rescue financially troubled EU member states has gone from being a high-level brainwave from a pair of economists to a major policy initiative backed by powerbroker Germany. In EU terms, that’s Formula One fast.
Yet while German Chancellor Angela Merkel appears to be behind the concept, even if she has concerns about a possible need to change the EU’s treaty, no one has put much flesh on the bones of the idea apart from the original proponents — Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, the chief economist of Deutsche Bank.
Gros and Mayer set out their proposal in an academic paper and synthesised it in a column in The Economist last month. In essence the idea — and it remains to be seen if EU policymakers take it up wholesale or develop something along different lines — is fairly straightforward.
It would involve fiscally slack members of the EU — those with debt and deficit ratios above the EU’s Maastricht treaty ceilings of 60 percent and 3 percent of GDP respectively — paying into the fund in proportion to how much over the limits they are.
For example, Greece has a debt-to-GDP ratio of 115 percent (55 percentage points over the limit) and a deficit of around 13 percent (10 points over). That would mean it paying 0.65 percent (55+10) of its GDP into the fund, or about 2 billion euros.
If such a fund had been created in 1999, at the same time as the euro single currency came into being, and all those who exceeded the Maastricht criteria had paid in accordingly, the fund would now have about 120 billion euros in it. That’s nowhere near the $825 billion the IMF can ultimately call on from its 186 member countries, but it would be enough to help out one or two medium-sized EU economies should they face a similar crisis to Greece.
That may be all well and good, but there are two immediate problems. One is that no one thought of the fund 11 years ago so it doesn’t have anything in it yet. To get up to 120 billion euros according to Gros and Mayer’s formula could take at least another decade of countries paying in, far too much time to help out Greece with its current problems and with the risk that one or two financial crises could affect other EU member states in the meantime.
Instead, Gros suggests raising capital via credit lines and the eurobond market — issuing highly rated debt to finance the start-up of the fund. In the course of a few months it might be possible to raise as much as 100 billion euros, but it’s still a tall order and unclear how much enthusiasm investors might have about so much debt being issued into the market in a relatively short timeframe.
But another, longer-term problem with Gros and Mayer’s proposal would seem to be that it targets the very countries that might need help the most. Greece and others such as Portugal and Spain might be forced to pay into the fund for years in a row, until they get their debt and deficit levels down to acceptable levels. But the money going into the fund might be just as well be spent reducing their deficit, particularly as the sooner they get that down, the less they would need access to the fund in the first place.
In that respect, the proposal would appear to be a bitter-medicine-just-in-case kind of solution, or in other words an insurance premium paid into a ‘rainy-day’ fund for the EU’s most financially profligate. Countries might not like that, but if it’s sufficient to ward off speculators, maybe it would be worth it in the end.