The European Commission has indicated it is ready to set up a ‘European Monetary Fund’ to remedy future eurozone debt crises. The fund would operate in a similar way to the International Monetary Fund - on which all EU member states sit - offering financial aid to countries on the condition that they enact severe budget cuts. A spokesman for Economic and Monetary Affairs Commissioner Olli Rehn told journalists, on 8 March, “The Commission is ready to propose such a European instrument for assistance, which would require the support of all euro area member states. This should be based, of course, on rigorous conditionality”. The proposal will be put forward before Spain hands over the rotating Presidency, at the end of June.

The move marks a turnaround for the EU executive, which previously refused to be drawn on what kind of aid could be made available for countries like Greece, which has been battered by high borrowing costs on financial markets. The country owes €300 billion this year, 120% of the country’s GDP (and twice the EU’s limit). EU leaders have said only that they will take “determined and coordinated action” to stabilise the single currency, demanding a third austerity package from Greece to help reduce its budget deficit by four points this year, from 12.7% of GDP, four times the Maastricht Treaty limit.

Greek Premier George Papandreou has continued to ask for EU help to deal with the country’s financial woes, which have escalated since last October when his new Socialist government admitted its predecessors had tweaked public accounts. Last week, he threatened to go to the IMF if the EU did not intervene.

The idea of an EMF is being led by German Finance Minister Wolfgang Schäuble, but the Commission is known to be in touch with French officials on the plan, which is likely to be based on a February policy brief written by Deutsche Bank’s chief economist, Thomas Mayer, and Daniel Gros, the director of the Brussels think tank CEPS. Mayer and Gros argue for a new institution to be set up, pre-funded by its members, which could guarantee risky debt and bail out countries that are unable to borrow on financial markets. Errant member states like Greece, Ireland and Latvia, which have all exceeded EU deficit and debt limits, would make annual contributions to the fund based on the value of their excessive debt. They would then be entitled to EMF guarantees to the value of their contributions. The EMF could also borrow on markets by issuing a eurobond at a single rate of interest.

“With the EMF in operation, a crisis would be much less likely to arise,” Gros and Mayer write. “However, should a crisis arise, the EMF could swing into action almost immediately because it would not have to undertake any large financial operation beforehand.” If countries fail to make the budget cuts demanded of them, they could be threatened by the suspension of cohesion funding, Gros says, or face the spectre of their bonds being ineligible as collateral for European Central Bank liquidity.

But visiting fellow at the Bruegel think tank, Zsolt Darvas, says the fund is unnecessary. “I don’t believe there is a threat to the eurozone,” he told Europolitics,saying that Greece should be able to deal with its own problems. “This is the normal way financial markets should operate. They discipline misbehaviour. They have to pay a price.”

TREATY

A second problem with the EMF, Darvas said, is that it would more than likely cause another change in the treaty, something EU leaders are loath to look into. The Lisbon Treaty forbids bailouts (Article 123) but it does allow for closer economic coordination and surveillance among euro-using countries (Article 136). In fact, the Commission is due to come out with proposals based on Article 136 in the next few weeks. There is also Article 121, which allows for a bailout where a member state is facing difficulties down to “exceptional occurrences beyond its control”. Gros says the EMF will have to be an institution, but it could be established under a special treaty provision on “enhanced cooperation” (Articles 326-334). It could also be fast-tracked outside the treaty and later incorporated into it, he told Europolitics.