European Monetary Fund, Arriving Soon

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.

18 responses to “European Monetary Fund, Arriving Soon

  1. I did read your Businessweek article yesterday afternoon and whole-heartedly agree, although I’m still kind of vague on IMF’s inner workings; however, your suggestion for an Emerging Monetary Fund really sounds like a great proposal – it would probably help those emerging markets obtain better leverage and more say in shaping their economies.

    Taking a longer and historical perspective, notions of capitalism got me thinking again. If Das Kapital is a little hard to read http://en.wikipedia.org/wiki/Das_Kapital an easier way to digest some of the more intense reading is through the thinner paperback – “Marx For Beginners” – strangely but rather accurate introduction to some of the more complex notions brought up in Das Kapital – http://adjix.com/z95y; (reviewed as “….Whilst countless philosophers have buried themselves in metaphysical conundrums, Marx was the first that predicted the power of money relations in the modern world. One need only look at the global situation today….Maybe communism wasn’t the remedy, but neither, does it seem, is capitalism.”). They’ve tried aspects Marxism in parts of Africa with, at best, mixed results, something China already discovered (“China is following in the footsteps of the rest of Asia. South Korea used capital controls and state-owned banks as part of its early development strategy…..It was also tried in the “mixed” economies of Europe, and India under the License Raj.” http://snipurl.com/up2zg), and what the former Soviet Union succumbed to by the early 1990s http://snipurl.com/up2wi (their socialist underpinnings overtaken by capitalism, though, evolving into a more stable market-driven economy after going through some tough ‘growing pains’ (as was in Poland, perhaps… want to read that book too…)

    President Obama said that he “would rather be a really good one-term president” than have two mediocre terms,” but would the Democratic Party be willing to agree (seems unlikely). Even if the U.S. economy is anemic and still “recovering” from permanent job losses by 2012, speculation says President Obama still serves two terms–voters memories are about as long as is the daily shelf-life of the news cycle and realistically, the political alternative would be “The Party of No” or should I say, the Party of No-Nothing, updated: http://en.wikipedia.org/wiki/No-Nothing_Party In the meantime, $15bn jobs bill passes in Congress while Citi get $45bn in govt guarantees – go figure….

  2. Daphne Millar

    The worrying thing about this proposal is that it is being done as much from fear that the IMF is too soft as from a genuine desire to have more facilities available. The Germans fear that the IMF would be willing to give Greece help without the draconian conditions they would like to impose. Trichet at the ECB clearly has the same fear. So this is really a move to block access to the IMF rather than open a new resource.
    A European fund in the right conditions would be a good idea; but those conditions don’t exist yet.

  3. Agree with Daphne here. The best way out for Greece is to exit the Euro and renounce the ludicrous provisions of the Maastricht Treaty. Barring that, some sort of fiscal re-distribution mechanism needs to be created to provide support for countries experiencing debt-deflation. The new EMF proposal is neither of these things.

  4. I would bring together EMF, common issuance of EU bonds and financial transaction tax as a stronger case for EU bonds common issuance (no simple roll over or fund to help in difficulties). That’s will make a real difference from IMF…
    http://mgiannini.blogspot.com/2010/03/stronger-case-of-eu-bonds-common.html

  5. Is that N Klein of Disaster Capitalism speaking there? If so, Simon should be pleased.

  6. “The best way out for Greece is to exit the Euro and renounce the ludicrous provisions of the Maastricht Treaty.”

    I wish someone in authority would simply state this. How ludicrious to think that the 1/2% transaction efficiency gain from single currency union (if it’s even that high) could compensate for this kind of mess. Any amount of money lent to Greece can’t possibly be repaid if Greece is to serve as a model for all of Spain, Portugal, UK, Austria, Italy, etc…

    An ‘austerity’ based model is, essentially, an export-led growth model. The only way it works is if the country can generate enough in exports to cover external debt payments. This would mean that Germany would need to become a net importer from pretty much the entire southern half of Europe. Can Germany offer that much final demand, particularly when demand for its own export industries is sucking wind due to lack of demand from the South?

    If export-led growth fails, then debt must be addressed by mark-downs, which means formal rescheduling or inflation. Countries that borrow in foreign currencies are asking for trouble, and all the Euro did was allow Greece to go much much further into debt than would have been possible if it had been reliant on its own currency. Yay for “low rates”.

  7. “The best way out for Greece is to exit the Euro and renounce the ludicrous provisions of the Maastricht Treaty.”

    That is exactly why the “International” (read: US) Monetary Fund has launched an all out attack on the EU and its institution. Originally conceived as a pillar of monetary stability the IMF is now deliberately trying to sow instability because the EU and the Euro are an obstacle to the lust for financial power of the American banks. It was not enough to ruin the Third World with credit given to potentates followed by SAP’s or top ruin the US’ middle class with “subprime lending”, now the EU has to be destroyed.

  8. JR Max Wheel

    There seems to be a muddle going on here, the EMF European Monetary Fund proposal is a belated attempt to provide the missing fiscal mechanism in support of the €, it is utterly unclear just how this is going to work except tio say that it is politically more acceptable than a German bailout of Greece and cynically as observed by folmer might just stop Greece going to the IMF with all the attendant embarassment that entails. Interestingly the IMF has (at least) formally welcomed the formation of an EMF – Dominique Strauss Kahn’s comments. We need to go very much further though and create a proper international resrve currency. It has been said ad nauseum, that the US cannot simultaneoulsy serve two masters managing its own domestic monetary policy in national interests and that of the international community dependent on USD. The IMF has to morph into a body which is sufficiently to support a truly representative SDR standard embracing all G20 major currencies

  9. No, but you are the fourth person on this website to think so. My first name is Nolan, and I am just a simple high school social studies teacher.

    And hi StatsGuy, haven’t seen you commenting on the website in a while. I wish James would ask you to write another blog post or something. I miss your analysis.

  10. Hi JR, interesting comment. I’m from Astoria, Queens, which has a very large Greek population, and recently I’ve been trying to get a feel for how the ex-patriot Greeks about the current financial difficulties the Greek government finds itself in. Almost universally the people I have spoken to agree with Daphne’s comment above that this new proposal for an EMF is mostly a response to the fear that the IMF will be too soft on Greece. The friends I’ve spoken to claim that rather than being a belated attempt to provide the missing fiscal mechanism in support of the Euro, the proposal for a new EMF is designed to put the Greek government even further under the thumb of the larger EU countries like France and especially Germany. I guess my friends aren’t exactly objective commentators though. I’m certainly interested in learning more about the details of the new EMF proposal as they come out. Thanks for providing a different opinion though.

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  13. Very good Beth. I will enjoy reading some of those references. Just wanted to compliment you on your comment

  14. ‘Greece’ may be a well established nation state, but it is not monolithic. The Euro has been a tremendous boon for certain sectors (Athenians, professionals, those employed by the government) and a burden on others (working poor, rural people). The inflation caused by introducing the Euro to the cash-poor rural economy was significant – whatever the drawbacks of the Drachma, at least it was a highly liquid currency.

    Another hidden cost to the Euro is how easy it has made exporting liquid wealth out of the country. The Swissair flights out Athens are packed with doctors, lawyers and businessmen who take their fees in cash and make regular trips to Zurich to sequester their black-market income. This money is not only not taxed, it never re-enters the Greek economy. The wealth of Greece is being systematically hoovered out of the country. Maybe an EMF will create enough faith in the future that this process can be stopped.

  15. I wonder how this EMF would be funded? Would it be as its supporters claim a function of a 1% tax on all money a given EU country has about the Maastricht Treaty Debt and Deficit to GDP requirements? How long would a country have to be above the 60 and 3% thresholds, respectively. I feel as though countries with stout track records would be given substantial temporal leashes while the PIIGS would be put on a spit and roasted within months and prayed upon by speculators. Look if you go ahead with this EMF and the Lisbon Treaty you are opening yourself up to a common currency aggregate that has no ceiling (i.e., a global currency). Talk about too big to fail! Or is it too interconnected to fail?

  16. Why not copy the IMF funding model but with a Euro base and an EU corpus? I believe we would welcome another global currency mechanism allowing our dollar to be more responsive to US requirements? Not sure of this but TBTF bank advantages of global dollar seems to have a dark side?

    Corrections welcomed.

  17. The deficit hawks and mainstream economist in Europe make fun of the establishment of an EWF, by calling it as a „Debt Fund“, since the matter is not currency, but only debts, they claim. The Bundesbank, which doesnt like migrants in Europe, for example is against the EWF.

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