Does Europe Need A Monetary Fund?

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Europe, it appears, is finally trying to get its act together to avoid the shame of intervention by the International Monetary Fund (IMF) to rescue Greece whose governance it shares with the United States. The IMF rescuing Greece would amount to the rest of the world bailing out a European country using the various country contributions per the respective country quotas to the IMF. Because money is fungible, it cannot be said that certain IMF member countries are coming to the assistance of Greece and others are not. So, Europe wants to keep it within the European Union (EU).

That the EU needed some form of supra national fiscal redistribution was known for some time. That it did not have it thus far is therefore disappointing. And that crises are necessary for change is a bigger disappointment, pointing to a failure of politics. Therefore, in addition to the European Commission (EC) and the European Central Bank (ECB) the EU wants to create a European Monetary Fund and a new acronym EMF, when the problem was caused by the regulatory failure of the EC.

The EC should have amended the treaties governing the EU and the European Economic and Monetary Union (EMU) to enforce the rules more comprehensively by requiring transparency from member states in their government finances. Further, an EMF would work similarly, most likely, to the IMF: every EMU country would contribute to a common pot based on a weighted voting quota as a function of its gross domestic product (GDP) and the degree of integration into the EMU. These contributions naturally would come from the tax receipts of the member countries and the EMF would be staffed by a politically appointed board and a bureaucracy, similar to the IMF, to surveil every EMU member’s macroeconomy to advise them of the balance of risks and to come to assistance as a lender of last resort. The EC would most likely be the overseer of the EMF, and the IMF would work with the EC, ECB and the EMF.

Such a function is necessary but is a separate institution necessary? The ECB can be a lender of last resort and perform the same functions. If the ECB can do so, the governments of the EMU member countries need not contribute to the EMF from their tax revenues which would be an additional budgetary expense. The ECB can create a last resort lending facility similar to the Fed’s discount window for its member banks contingent upon the macroeconomic surveillance of the EMU’s member countries.

The institution that the EMU really needs is a complement to the ECB for EMU-wide financial market regulations and regulatory enforcement, not a separate EMF, to create common EMU financial markets.


About Chandrashekar (Chandra) Tamirisa
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