1. Establish the EMF outside existing EU structures.
The new EMF must have nothing to do with the EU. This is crucial. The greatest obstacle to the establishment ofa European Monetary Fund is said to be the need to amend existing EU treaties, which would require the gruesome business of 27 national ratifications, including referenda. Memories of the Maastricht, Nice and Lisbon treaties make it an unappealing project, even if the political will is there in the reborn Paris-Berlin axis. Who wants to go through that again? However, no nation had a referendum when it joined the IMF, and if the EMF was completely separate from existing EU structures and aped the IMF's role, then it would not require referenda either. In some nations it might not even need primary legislation, as it would be a matter of writing a cheque and sending the finance minister and/or central bank governor to vote at six monthly conferences.
2. Invite everyone, and house it in Norway.
There is no reason why the new EMF could not spread beyond the EU and encompass at least the European Economic Area, and perhaps set its bounds wider still and wider. So as well as wealthy Norway and broken Iceland in the EEA, we might, conceivably, also invite Switzerland, Serbia, Macedonia, Albania and the rest of the non-EU continent. Turkey could subscribe to the EMF, if only as some sort of recompense for the EU's reluctance to allowit in as a full EU member. So could Ukraine, currently under the care of the IMF, as is Hungary and others; these hospital cases could be gradually referred to the new EMF. The headquarters, for the sake of symbolism, might also be usefully located outside the eurozone or EU; Oslo is a charming city, and the Norwegians enjoy by far the healthiest public finances on the continent; an excellent example to others. Like the fresh Nordic air, the new EMF might inhale some of that cool rationality. Alternatively, there's always Zurich – or London...
3. Make it Germany friendly.
The IMF doesn't need a constitution, but it does need rules. For want of anything better, these rules could be copied from the IMF. Like the IMF, nations could be allocated voting strengths on the basis of their contribution to the fund's coffers, which in turn would be related to their GDP (though more precisely than the current distorted IMF weightings).
As Germany would be the largest economy in the EMF, and with the UK, France and Italy would make up a majority of the votes, it is difficult to see how the EMF wouldn't be dominated by these powers, though establishing as wide a membership as possible might dilute that in time. As with the IMF, a large majority could be demanded for important decisions; a quick computation of relative GDPs/voting strengths suggests this could be set at 80 per cent, which would offer Germany an effective veto. (Just as the IMF rules give the US a de facto veto).
4. The EMF is not a Euro Treasury
So that it would not evolve into a eurozone or EU Treasury Department, controlling (or loosening) deficits and interfering in tax and public spending, the EMF must be just about lending to economies in distress, as is the IMF.
The conditions of loans would be tightly drawn, and the supervision by EMF officials would be intense, as with the IMF now. It would, thus, not simply be a cover for Germany to subsidise Greece for political reasons. The Norwegians, or the British, say, have little interest in rescuing a eurozone member for the sake of the euro, which they are not a part of; but, as with an IMF intervention in Greece, they do have an interest in preventing a neighbour from going bust and in ensuring that they do, in due course, get their money back, with interest.
Even though Greece is a relatively small economy, a crisis there would represent systemic risk, just as Northern Rock, a pretty small bank, caused damage far beyond its immediate business. Indeed, all the headlines about the Greek crisis, the euro crisis and the PIIGs (Portugal, Italy, Ireland, Greece and Spain) have probably knocked business and consumer confidence already, as people hold off important decisions while they see how the crisis gets resolved. That has helped push Europe back into stagnation in recent weeks. Everyone in Europe has an interest in bolstering the continent's economic stability.
It is a cold, economic calculation, and nothing to do with bailing out profligate nations for the sake of the European project or vision. The idea would be to have a mini-IMF, rather than yet another arm of the Brussels bureaucracy at work.
5. Don't replace the IMF
The EMF should act in coordination and in addition to the IMF. Its resources will never be as massive as the IMF's, so for rescuing larger economies – the UK or Spain, say - it would have to work in tandem with the IMF. In some cases it might be politically or diplomatically sensitive to mount a joint IMF/EMF rescue operation; as we have seen in Greece, memories of the Second World War are often scarcely below the surface in parts of the continent, and there is no great reason to stir them up again if it can be avoided.
While not wishing to create yet another ivory tower or talking shop, the EMF could also supplement the excellent research on economic prospects and financial stability that the IMF produces.
6. No deflationary bias
Politicians and central bankers continually talk about "learning the lessons" of the past. Well, the greatest single mistake that the architects of the IMF made was to build into it a deflationary bias. This is something that Mervyn King, the Governor of the Bank of England, reminds us of at every opportunity, and the point is relevant and much more than historical.
Nations that ran unsustainable trade deficits were forced to deflate; those that ran healthy surpluses were left alone, leaving the burden of adjustment uneven. So the EMF should be encouraged to lean on surplus nations to reflate as often as it urges deficit countries to deflate.
That, it has to be admitted, would cause problems in Germany, a country which sees its trade and budget surpluses as badges of economic success. The argument in the Bundestag would be that it was being penalised for running things properly and keeping inflation down. So initially, like the IMF, the EMF might have to work with that handicap. Economic diplomacy, like domestic politics, is the art of the possible; but some sort of EMF, though it might it take years to establish, is perfectly feasible.
Comments