The European Monetary Fund

An expensive political fig leaf for enforcing Stability and Growth Pact discipline.


Among the deluge of proposals covering the regulation of hedge funds, derivatives, remunerations, the separation of commercial and investment banking activities or the illusory fight against speculation, the latest, engendered by Greece’s tribulations, concerns the creation of a European Monetary Fund (“EMF”).


Let us take note, first of all, that this proliferation of ideas, often insufficiently thought out, is rapidly reinforcing the trend towards protectionism and augurs nothing good in terms of agreeing within the G20 to a global financial architecture that would be compatible with a coherent regulatory/supervisory framework adapted to the conditions prevailing in each of the main monetary zones of the planet.


A regrettable example is given by the letter addressed by US Treasury Secretary Geitner to EU Commissioner Barnier warning against implementing regulations imposing greater transparency on hedge fund under the pretext that this might put American Funds, based in London, at a competitive disadvantage in the EU. This zealous defender of free markets forgets rather easily that a few weeks ago, his boss, President Obama, suggested, without any prior consultation, the reinstatement of a separation between commercial and investment banking activities (Volker rule). Even if these proposals have undeniable merit, there is little doubt that their unilateral implementation in the United States would create an uncompetitive playing field for European banking institutions active on the other side of the Atlantic.


As for the diatribes against speculators, (members of a nebulous fraternity never defined with precision) they might well satisfy a justifiably frustrated public opinion but are rarely accompanied by concrete proposals that aim at dealing with the root causes of the phenomena, that is to say the political, economic and financial incoherencies that “speculation” reveals.


Let us now turn to the idea of an “EMF”. It has emerged to address two main problems: the first is to counter – on totally understandable ideological grounds – the need for a Eurozone Member to turn to the IMF; the second is to remedy the shortcomings of the Treaty that appear to deny the existing Community organs the necessary powers to deal efficiently with the situation.


It does not require great political savvy to realise that an EMF would be a convoluted way to impose efficient “sanctions” – described euphemistically as “conditionality” –rightfully imposed on Members in exchange of the Fund’s intervention. One should recall that, when the Stability and Growth Pact was amended a few years ago, the aim was diametrically opposite, when it became clear that some of the key participants (Germany and France) were experiencing the greatest difficulties to meet the requirements of the Pact as originally conceived.


A second obstacle that the creation of an EMF could circumvent – or even dissimulate – is the visceral reticence of several Member States to make use of the Union’s credit capacity. The intermediation of a new “Institution” could serve as a smokescreen, making less obvious the explicit joint and several guarantee given by Member States to the EU’s commitments.


Both these objectives could, nevertheless, be reached in a much simpler (and economical) way through the amendment of the description of the existing budgetary line  “balance of payments assistance”(€50 billion) - to which currently only non EMU members have access - so as to encompass all 27 Union Members. This process would amount to reinstating the well tried mechanism through which the Union was able to provide financial assistance in the 1980’s and 90’s, when countries such as Greece (already then) or Italy were facing difficulties. At the time, these operations were often organised with the technical support of the IMF and nothing should prevent this useful expertise to be called upon once again.


If, to reach these worthy goals, it appears “politically” expedient to create an EMF, then one will have to accept its additional significant costs, the sensitive discussions concerning senior appointments and, most damaging, the unavoidable delays that the implementation of such a project would require.


Once one gets rid of the “dressing up”, the finality of the EMF can be assimilated to a step in the right direction towards the necessary deeper economic integration within the Eurozone and an acceleration of the extension of EMU to all 27 Member States, as mandated by the Treaty.

10:25 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles dans Général | Lien permanent | Commentaires (0) |  Facebook |

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