Brussels calls for creation of European Monetary Fund

Brussels calls for creation of European Monetary Fund

13:07 - European Commission seeks to overhaul institutions and functions of the eurozone

Brussels has called for the creation of a European Monetary Fund and financial aid for countries hit by economic shocks, as it pushes ahead with ambitious plans to overhaul the institutions and functions of the euro area.

The European Commission said its proposals were a natural response to shortcomings of eurozone governance that were brutally revealed by the sovereign debt crisis. Jean-Claude Juncker, the commission president, said the plans showed Europe taking its future “into our own hands,” echoing calls from French president Emmanuel Macron for the bloc to assert its “economic sovereignty”.

Valdis Dombrovskis, commission vice-president in charge of the euro, said the reform plans presented a “balanced” set of ideas. “It’s a package that can help the resilience of monetary union and restart the process of convergence,” he said. “We are hoping for support and a constructive approach from member states.”

But officials from EU member states are warning that many of the headline plans could be jettisoned as national capitals are split over what direction further eurozone integration should take. The centrepiece of plans unveiled on Wednesday is a draft law to turn the euro area’s bailout fund, the European Stability Mechanism, into a monetary fund with a broader role that would include acting as a lender of last resort in banking crises.

While Germany is keen on an EMF, the commission’s blueprint for the fund has stoked unease in Berlin and other capitals, where there are fears it will be controlled by EU institutions rather than national governments.

EU officials denied that the EMF plans amounted to a power grab and said they would improve efficiency of decision making and democratic accountability to the European Parliament.

The commission’s plans also wade into sensitive questions of how to support countries hit by an economic downturn but do not require full blown bailouts — an issue where Paris and Berlin are firmly split.

The plan is for a new “stabilisation function” that would protect investment spending by drawing on the EU budget and the new monetary fund to channel grants and loans to countries in need. France sees this kind of EU-level support as a key piece of the reform jigsaw, but Peter Altmaier, Germany’s acting finance minister, said on Tuesday that a number of governments “are not yet convinced” it is needed.

The commission’s plans also sketch out the job description of a possible euro area finance minister and link EU regional aid to nations’ performance in implementing economic reforms.

After years of being consumed by economic firefighting, Brussels is determined to capitalise on the continent’s robust recovery to equip itself with more crisis-fighting tools. But Donald Tusk, EU Council president, who will chair a summit next week where the ideas will be discussed, warned on Tuesday that governments would need to focus on clear, achievable priorities for the euro area reform push to make headway.

In a note circulated to capitals, he urged that governments focus their attention on completing a crisis-era project to clean up and properly oversee the banking system before attempting any “more ambitious ideas.”

Trying to complete that project, known as the banking union, would be a “reality check” for what is possible in the broader euro area reform agenda, he said.

Eurozone reform proposals

European Monetary Fund The centrepiece of Wednesday’s proposals, the EMF would take over the functions of the €500bn European Stability Mechanism, the euro area’s sovereign bailout fund.

Under Brussels’ blueprint, the EMF would be in charge of a planned last-resort financial backstop for the euro area’s system for handling banking crisis. It would also play a bigger role in monitoring countries’ compliance with the conditions of their bailout programmes.

There is broad agreement among governments that an EMF is desirable, but there is resistance to the legal form the European Commission is proposing.

National officials warn that Brussels’ plan will rob the ESM of its independence and make it subordinate to EU institutions.

Brussels argues that the move would improve democratic accountability. The issue is extremely sensitive for Germany, which makes the single largest contribution to the ESM’s capital.

Brussels is also proposing that majority voting, rather than unanimity, could be used to release bailout funds to speed up emergency decision making. Brussels wants governments to adopt the legislation to set up the EMF by mid-2019.

A European minister of economy and finance

The job would, in effect, put one person in charge of policing respect for eurozone budget rules, and forging deals between governments on everything from economic reforms to crisis bailouts.

The role would combine the existing posts of EU economy commissioner and eurogroup president, a step that Brussels argues “would facilitate co-ordination and implementation of economic policies”.

The paper also suggests that the minister could oversee the work of the EMF. Other tasks would be to try to set an overall fiscal stance for the euro area, to determine how far government spending policies could tilt towards stimulating the economy. This is something the commission attempted last year only to be rebuffed by governments. The minister would also prepare summits of euro area leaders.

Governments are split on the need for a permanent finance minister for the eurozone. Even France, which has pushed the proposal, thinks the position should be a long-term objective once other reform objectives have been achieved.

But Brussels wants governments to move faster and reach a “common understanding” on the role of the minister by mid-2019. The post could then be established in late 2019, around the time the next commission takes office.

A ‘stabilisation function’ for troubled economie

The commission has identified public investment — rather than unemployment reinsurance money or other emergency government spending — as the least politically contentious way to help out any member state hit by an economic “shock”

The paper envisages a mixture of loans and grants and says Brussels could establish a “dedicated vehicle” to tap different funding sources, including loans guaranteed by the EU budget or provided by the EMF. The EU could also establish an “insurance mechanism” based on voluntary national contributions

Brussels estimates that for the system to be effective it would need to be able to make net payments equivalent to at least 1 per cent of the country’s gross domestic product. In an effort to make the plan more appealing to Germany and other fiscal hawks, compliance with commitments made under the euro area’s fiscal rules would be a precondition for getting help

The commission stresses that its system avoids “permanent fiscal transfers” between countries, a firm red line for Berlin and others. Brussels will unveil more detailed proposals in mid-2018 as part of its preparations for the EU’s next multi-annual budget.

Money for reform

The commission plans also hint at how it wants to revamp spending of the EU’s large regional aid funds in its next multi-annual budget. It plans to improve incentives for governments to make “structural reforms” by rewarding the member states that have the best records on reforming economies and labour markets.

The plans say “extra grants” could be provided for countries that deliver on “multiannual reform commitment packages” agreed with Brussels. In that regard, the proposals provide carrots and sticks to governments — offering cheap loans and grants for tough times on the one hand, and beefing up the conditionality attached to other parts of the EU budget on the other. One priority is to encourage governments to undertake reforms to tackle excessive macroeconomic imbalances, such as running a large current account deficit.

Brussels’ intention is to trial the idea between 2018-20 before rolling it out in the EU’s next multi-annual budget starting in 2021. The commission also outlined support measures for countries preparing to join the euro, noting that all EU countries other than Denmark and the UK are “legally committed to joining the euro eventually”.

Jim Brunsden & Mehreen Khan

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