In the past few days, plans have solidified for a new European version
of the International Monetary Fund. Advocates, which include French and German politicians, say the institution could
save the Eurozone from the crisis created by Greece's debt woes. But is the new
institution necessary, and would it really solve the problems at hand?
In short, not everyone is convinced that conjuring up a massive international organization out of
nowhere is wise.
- The Key Facts Backed by Germany and France, the EMF would be an "IMF style backstop for Euro zone members," explains Business Insider's Gregory White. "[It] would function by allowing troubled states to roll over the debt to the EMF, which would then distribute EMF debt to the sovereign debt investors. Details beyond this are scarce at the moment." He mentions a few problems with the proposal, including that it is not backed by the European Central Bank.
- European Central Bank Opposition Maybe Not an Issue "Even if it could, I am not sure if the ECB would want to block Germany's initiative [regarding the EMF]," writes Financial Times' Ralph Atkins. The ECB wants to encourage fiscal discipline rather than substitutes for it, but Atkins thinks not all at the ECB may be opposed to the new institution, and that "the devil will be in the details."
- Advantage: EMF Wouldn't be the IMF "It cannot be overstated how much European officials fear an IMF bail-out of Greece or other countries," writes the BBC's Gavin Hewitt. "It would not just be a humiliation; it would be regarded as a verdict of no-confidence in the eurozone." Of course, he acknolwedges, treaties are tricky, and creating an EMF would be controversial: some think a "ready-made bail-out facility ... might encourage irresponsibility."
- Long-term Necessity Giancarlo Corsetti and Harold James argue in the Financial Times that the Greek crisis stemmed partly from problems in the European system as a whole, and that the EMF might fix them without problems of moral hazard and without the political wrangling that usually characterizes "support operations." Though it may be impossible to create right now, "in the long run, Europe needs something like an EMF." Meanwhile, Daniel Gros and Thomas Mayer argue in The Eonomist that while one of the first problems of the Eurozone may be fiscal irresponsibility, the second is "failure to allow for an orderly sovereign default." The EMF would address this problem.
- Really? The Economist invited a number of experts to weigh in, and they weren't convinced. One called the proposal "reinvent[ing] the wheel," given that the IMF already exists. Economist Tyler Cowen also expressed skepticism that the new institution will solve the problems its proponents say it will.