Page last updated at 09:46 GMT, Tuesday, 16 March 2010

European Monetary Fund: What might it look like?

By Andrew Walker
Economics correspondent, BBC World Service

Wolfgang Schauble
Germany's finance minister wants an EMF to impose tough conditions

It has been conceived, but not born yet.

But it already has a name - the European Monetary Fund (EMF).

Actually, it is probably better not to press the analogy too far.

The prospective parents do want it, but they would be much happier if they did not need it. So if this "baby" does see the light of day, it will not be a joyous moment.

Cleaning up

Although we know the name, we have little detail of what it will look like.

But we can speculate.

Comments by European politicians have given some insight into the EMF. And there is an EMF template - the International Monetary Fund (IMF).

The purpose of the European Monetary Fund would be to clear up when a country got into difficulty with its finances, and probably intervene early to prevent that happening in the first place.

Broad instrument

And why do that?

Greece riots
Greece's financial crisis brought rioting to the streets of Athens

To protect the rest of the euro countries from the consequent turmoil.

That is how it is seen by the Luxembourg Prime Minister Jean-Claude Juncker, who is also chair of the Eurogroup of finance minsters.

"[The EMF] would not be an instrument for Greek-style solutions, were this to be necessary, but a somewhat broader instrument that would protect the entire eurozone, not only one country," he says.

Proper teeth

Surveillance and rescue is what the IMF does.

It routinely keeps its eye on member countries, with regular health checks, about once a year. And it lends money when countries get into difficulty.

The IMF's routine reviews do not really have proper teeth.

The idea, emphasised by critics, that the IMF forces countries to do things, is only really relevant to cases where the country is seeking financial assistance.

Prohibitive costs

The European Union (EU) has not done very well so far with its monitoring, as the Greek crisis has shown.

Not only did the rest of the EU fail to exert any great influence over the Greek government's finances, they did not even know what the true position was until they were told by Greece after a change of government.

It seems likely that Germany especially would want any European version of the IMF to have more intrusive monitoring powers.

German Finance Minister Wolfgang Schaeuble also wants tougher enforcement of the existing rules on fiscal policy, which put limits on how much governments can borrow in normal economic circumstances.

But if the crunch were to come, Mr Schaeuble thinks there should be an institution, a European Monetary Fund, to provide emergency loans.

But he wants it to be unpleasant for any country that does borrow. The cost should be prohibitive, probably in the shape of some combination of high interest rates and financial penalties.

And he says there should be strict conditions, which presumably means the kind of painful spending cuts that Greece is trying to implement now.

No open-ended commitment

The decisions would be taken by the Eurogroup, ministers from the countries using the euro, in consultation with the European Central Bank.

They would presumably also be the countries that paid for it, with some sort of subscription along the lines of what they pay into the IMF to provide the resources for its lending operations.

But what Mr Schaeuble proposes is not an open-ended commitment. In some circumstances he suggests it might be best to allow the country concerned to default and even give up using the euro - though still remaining within the EU.

That just serves to emphasise that this idea is not about fixing the current crisis with Greece. Forcing countries to give up the euro would require amendments to EU treaties.

That would take years, especially as there are so many features of how it would work that have not been agreed.

But eventually the EU will have another crisis, and maybe - just maybe - the EMF will by then be Europe's financial firefighter.



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