By Simon Johnson
American officials are annoyed and deeply skeptical – not thinking that this will amount to anything. But the future has finally arrived – or perhaps its arrival has just been announced – in the form of the European Monetary Fund.
Such an institution would represent a major reshaping of global financial architecture, undermining the traditional basis of power for the United States – which would prefer to keep the International Monetary Fund (IMF) paramount. This is a good thing for the world, but also for the IMF and – believe it or not – for the US.
I laid out the case for regional Monetary Funds in BusinessWeek last year. The main point is that it makes sense to have a two tier system – at the regional level (or for countries grouped in some other way, like “emerging markets”) and at the global level, meaning the IMF.
The regional entities would be like your family doctor; the IMF runs the big hospital. If you go in with chest pains, your friendly physician will try to get you to change your diet, exercise more – and may also provide some relatively harmless pills. If you have a heart attack, however, you need to go to the emergency room – where their bedside manner may be less than ideal, but they can actually save your life.
How much capital would the EMF need in order to be credible? We’re obviously at an early stage, but as a first pass I suggest 250 billion euros in “cash equivalents” as capital and another 500 billion euros in the form of credit lines.
Will the EMF include only euro countries or cover the whole European Union? This probably depends on how involved France and Germany would like to be with Britain’s problems. My guess is that they’ll stay away, at least initially – so the “euro members only” sign will go up.
And, of course, there will be a lot of huffing and puffing on the European stage before the deal gets done. But they’ll get the EMF done, probably sooner than you think.