Belfast Telegraph

Friday 22 August 2014

How EMF could stop the Greek fires spreading

Could a European Monetary Fund (EMF) be part of the answer to Greece's problems? Sadly, probably not, if only because it would take too long to establish.

But an EMF could help resolve similar problems in the future. One of the joys of journalism is not having to work things out as carefully as policymakers do, so here are a few wild ideas about how the EMF might be set up.

Establish the EMF outside existing EU structures.

The new EMF must have nothing to do with the European Union (EU). The greatest obstacle to the establishment of an EMF is the need to amend existing EU treaties, which would require 27 national ratifications. However, no nation had a referendum when it joined the International Monetary Fund (IMF). If the EMF was completely separate from existing EU structures and aped the IMF's role, then it would not require referenda either.

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 (EEA) and perhaps even set its bounds wider. So as well as wealthy Norway and broken Iceland in the EEA, |we might also invite Switzerland, Serbia, Macedonia, Albania and the rest of the non-EU continent. The headquarters, for the sake |of symbolism, might also be usefully located outside the eurozone or EU.

Make it Germany friendly.

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. 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.

Make sure the EMF is not a Euro Treasury

So that it would not evolve into a eurozone or EU Treasury Department, controlling deficits and interfering in tax and 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. It would, thus, not simply be a cover for Germany to subsidise Greece for political reasons.

All the headlines about the Greek crisis, the euro crisis and the PIIGs (Portugal, Italy, Ireland, Greece and Spain) have knocked consumer confidence. Everyone in Europe has an interest in bolstering the continent's economic stability. It is a cold, economic calculation, nothing to do with bailing out nations for the sake of the European vision.

Don't replace the IMF

The EMF should act in coordination and in addition to the IMF. While not wishing to create another talking shop, the EMF could also supplement the research on economic prospects and financial stability the IMF produces.

No deflationary bias

The greatest single mistake the architects of the IMF made was to build into it a deflationary bias.

So the EMF should be encouraged to lean on surplus nations to reflate as often as it urges deficit countries to deflate.

That would cause problems in Germany. The argument in the Bundestag would be it was being penalised for running things |properly. 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.

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