In the latest issue of The Economist (20 February, Disciplinary Measures) Daniel Gros of CEPS, Brussels, and Thomas Mayer of Deutsche Bank also advocate the kind of European Monetary Fund recommended by Giuliano Amato (see our previous post).
Their EMF would mimic the IMF in "having a professional staff remote from direct political influence and a board with representatives from euro-area countries." It "would conduct regular and broad surveillance of member countries"; "its main role would be to design, monitor and fund assistance programmes for euro-area countries in difficulties, just as the IMF does on a global scale". An IMF clone - so far. The main differences between the two Funds would concern funding, disbursements and sovereign default.
For its funding the EMF would borrow "in the markets with the full and joint backing of all its member countries", but "Only those countries in breach of set limits on governments’ stocks and annual deficits would have to contribute, giving them an incentive to keep their finances in order”. “Countries could, for instance, be charged an annual contribution of 1% of their “excess debt”” over the Maastricht limits of 60% of GDP, and of their excess deficit over 3% or GDP. Gros and Mayer reckon that by these rules the EMF would have accumulated €120 bn over the last decade; in 2009 Greece would have had to contribute 0.65% of GDP. A fine way of deterring moral hazard behaviour, but an additional burden both on the profligate country in need of assistance, like Greece, and on the club of delinquent countries (like Spain Portugal Italy Ireland) that share a similar predicament. Surely if the EMF had borrowed on international markets “with the full and joint backing of all its member countries” the richer and more disciplined countries could not ignore their commitments; its creditors would see to that.
Disbursements to member countries would be made up to the amount each has contributed in the past to the EMF – i.e. would depend strictly on earlier large scale financial indiscipline – conditionally on their fiscal adjustment programmes being approved by euro-area finance ministers, with tougher conditions (including EMF status of privileged creditor) applying to withdrawals above past contributions. Further finance would be tied to specific, authorized purposes.
Finally, in case of sovereign default the EMF would “offer all holders of debt issued an exchange against new bonds issued by the EMF”, requiring creditors to take a uniform “haircut” (=loss) in order to protect taxpayers. Nothing new here, we are only replicating old-style Brady bonds. “The EMF could, for example, tie its guarantees to the 60%-of-GDP Maastricht limit on debt, so that creditors of a country with a debt stock of 120% of GDP would face a 50% haircut”: this is a very neat and ingenious disciplinary mechanism. “The EMF would only exchange debt instruments that had been registered with it beforehand”. This is to say, cosmetic derivatives traded with Goldman Sachs would not be covered.
Certainly such a European Monetary Fund would be better than “muddling through on the basis of ad hoc interventions”, as Gros and Mayer say. Ten years ago Daniel Gros used to advocate unilateral euroisation by transition economies, relying on foreign banks to provide the necessary euro liquidity at all times; the EMF scheme is more realistic.
But what is the value added of this “in house solution” with respect to what is on offer from the IMF? A duplicate set of functionaries, duplicate surveillance and monitoring and associated reports, duplicate draft stabilization plans embodying the same deflationary policies. No sovereign encroachment by outside bodies, but a lot of sovereignty encroachment by European agencies in the form of offers that cannot be refused. “A euro-zone country that refused to abide by the decisions of the EMF could choose to leave the EU, and with it the euro, under article 50 of the Lisbon Treaty. But the price of doing so would be very great”. First, the Treaty's draftsmen were so keen not to encourage the notion that dissolving EMU was a feasible option that there are no rules at all for either exiting the euro-area or expelling a member. Second, raising the stakes (tougher conditionality) may raise the probability of winning a game, but at the cost of making the loss catastrophic (EU exit) if the game is lost.