Europe plans its own answer to the IMF

The European Commission will seek fundamental reform of the management of economic policy in the eurozone, including the co-ordination of fiscal policy, as it draws up details of a future European Monetary Fund.

The proposed EMF, which was given further support yesterday by Angela Merkel, will go beyond the creation of a pot of money that would bail out errant members of the eurozone, such as Greece, a Commission spokesman said.

The talks in Brussels over the launch of such a fund will form part of a wider package of reforms that would enable Brussels to co-ordinate economic and fiscal policy among eurozone states.

The Commission will deliver a proposal “over the next two to three months,” the spokesman said. It wants what it calls preventive as well as corrective measures to pre-empt the disastrous accumulation of public debt by a eurozone member state, as well as to build an institution that might co-ordinate remedial action, such as a bailout.

The notion of an EMF that might have a similar role in the eurozone to the International Monetary Fund on the world stage in dealing with potential sovereign default was floated by Wolfgang Schäuble, the German Finance Minister, over the weekend. Yesterday, it gained the support of the German Chancellor.

However, the Commission is looking at even wider issues. Its spokesman confirmed that the EMF proposal was at a preliminary stage and added: “What we want to discuss is how to enforce the co-ordination of economies, how to co-ordinate the fiscal side.”

The objective is to address the economic imbalances between member states. The yawning gap between the economies of the core eurozone members, such as Germany, and the peripheral states was exposed by soaring interest rates on Greek government debt and triggered a market panic and a sell-off of the euro on foreign exchange markets. The soaring yield on Greek sovereign bonds threatened to push the cost of borrowing for Greece to unaffordable levels, even though the country was a member of the eurozone.

“We have rules and mechanisms to enforce them, such as the excessive deficit procedure but the issue [in the case of Greece] is non-compliance,” the spokesman said. Greece’s huge public sector deficit and its overall debt burden, which is expected to rise to 120 per cent of the size of its economy this year, came as a shock to the Commission because the true extent of the country’s runaway deficit was not revealed in published statistics until late last year.

Separately, the Commission is examining measures to curb speculation in sovereign debt, notably credit default swaps. Betting by hedge funds and other investors in these instruments, which were created to provide insurance against the default of an issuer, has been widely criticised.

Last week, the German Chancellor called for the market to be “curbed” and her stance was supported yesterday by President Sarkozy of France. However, the Commission said yesterday that the role of speculators should not be overemphasised and that economic policy reforms were necessary.

“Let us not put all the blame on ‘evil forces of the market,’ ” the Commission’s spokesman said. “The origins of this problem [Greece] had been under way for a long time. These imbalances need to be tackled.”

Carl Mortished, The Times 09-03-2010