Leaders of the 16-member eurozone are grappling to find solutions
The ongoing Greek debt crisis has rent fissures in the European Union (EU) and exposed the weakness of what was until recently considered as one of the EU’s chief success stories: The euro.
As leaders of the 16-member eurozone grapple to find solutions that would balance helping Greece with maintaining “face” for the euro, the one idea that has gained much traction over the last few days is that of a European Monetary Fund, or EMF.
The proposed EMF would function as a European equivalent to the IMF; a lender of last resort to financially troubled eurozone governments to ensure the stability of the euro and global markets. Under the direction of the other members of the eurozone, the EMF would dictate fiscal policy to the offending government in return for a bailout.
Its main benefit would be to free the eurozone of the ‘outside’ involvement of the IMF and thus maintain confidence in the ability of Europe to set its own house in order.
The idea was first mooted by Germany, the country in the strongest economic position within the eurozone and thus the one expected to be at the frontline of any financial aid of Greece. German Chancellor Angela Merkel has called the EMF a “good and interesting idea”.
France has added its support to the idea as well. French government spokesman Luc Chatel said on Wednesday that “the idea merits being examined”.
With the European Commission seemingly keen on the concept, all eyes are on the European Central Bank, whose position on the issue could be crucial to determining whether it has a future.
So far, the ECB has been somewhat agnostic with President Jean-Claude Trichet taking a cautious stand. He has said that he doesn’t “reject” the idea outright and it is also clear that he is unhappy with the idea of the IMF being called in on the ECB’s turf.
However, others within the ECB are more sceptical, dismissing the EMF as a creation that would only encourage bad fiscal habits amongst eurozone states.
ECB chief economist Juergen Stark, for example, has criticised the idea as ‘misleading’. “It would be the start of a European financial compensation that could be very expensive, set the wrong incentives and, ultimately, burden countries that have more solid public finances,” he said in a commentary in German newspaper Handelsblatt.
Other experts like German central bank chief Axel Weber have also slammed the idea saying “new institutions won’t help if the existing ones are ignored”.
The European Commission says it will take several months to hammer out the details of the proposed EMF. The establishment of such an institution may even require a new treaty to be adopted which is a cumbersome process.
But it is clear that whatever comes of the idea, from the Greek perspective, it will be too late to help. According to the latest Economic Outlook from the Organisation for Economic Cooperation and Development, gross public debt in Greece was 115 per cent of gross domestic product (GDP) last year, while the general government deficit was 12.7 per cent of GDP.
Greek Prime Minister George A Papandreou reiterated earlier this week during a trip to the United States that he would not rule out turning to the International Monetary Fund for help.