George S. May Business Blog

European Union Ponders Monetary Fund

The troublesome path of the Greek economy has led many members of the European Union to wonder if the time has come for the creation of a new monetary fund. Proponents have long argued that a fund set aside for countries in who find their economy in the same precarious positions would help buoy all EU nations.

But though a rising tide may lift all ships, don’t bet that this idea will be unrolled by the European Union’s Central Bank anytime soon. Many prominent members within the European Union are not convinced this is the right time to be discussing provisions for future aid, however most agree that this specific plan would not be appropriate to helping Greece out of their current situation regardless.

“It’s not helpful to talk about ways to institutionalize help when the question is how to implement the (Greek) budget reforms,” said Axel Weber of the central bank of Germany. Weber is an influential banker in the EU, and is expected by many to be president of the European Central Bank.

Weber’s position is not an uncommon one within the union’s inner circles, and many believe that the renewed idea of a European Monetary Fund, or EMF, couldn’t be properly implemented in time to alleviate Greek budget woes.  Most see it as a long-term project, if it is implemented at all.

The idea that such a fund would exist in the first place offends many who consider the idea to be counterproductive to getting each individual economy within the EU up and running. If a fund exists to be disbursed each time a country falters in its fiscal obligation, it could lead to the same kinds of disincentive American investors worry will affect the performance of companies partially owned by the government.

The underlying fear behind both ideas is that if a company or nations is not forced to be fiscally cautious, that they might play fast and loose with the money they do have, thus putting them in the same situation they started in.

Weber told a news conference, saying a “no bailout clause” was central to the theory of European monetary union.

His concerns echoed another strong criticism of a monetary fund which would exist to bailout EU members. Sharp concerns were also raised by ECB Executive Board member Juergen Stark, who said on Monday that a fund such as this would ultimately penalize countries with solid finances while also encouraging wayward spending from less prudent nations.

However, German Chancellor Angela Merkel defended the idea of a mechanism to deal with a member state’s insolvency in an orderly manner, which she believes would bring added stability to the European Union.  Merkel also said this mechanism would require a change in the EU’s Lisbon Treaty and would only be offered as a “last resort” for the future.

Merkel said Greece’s latest austerity plan announced last week, involving cuts to public sector pay and new taxes, had begun to convince markets, so again, the idea that Greece is still in imminent economic danger is so last week.

“Greece has won some trust back through the steps taken by its government,” she said, noting that a Greek bond issued last week had been substantially oversubscribed.

Greece’s debt agency chief said the country, which needs to roll over some 20 billion euros ($27.21 billion) in debt between April 20 and end-May, was not planning a new issue soon.

Athens raised 5 billion euros with a 10-year syndicated bond last Thursday but had to offer a yield of 6.4 percent, twice what Gemany pays to borrow.

On the prospect of helping other nations, the EU is still far from being absolutely certain. France and Belgium have their own differing views, and unsurprisingly the Dutch are being diplomatic as always.

Dutch Finance Minister Jan Kees de Jager questioned whether a new European institution was needed and said other existing options, including recourse to the International Monetary Fund, should be considered before implementing a similar measure of their own.

So with Greece safe, it’s time for the EU to get back to rebuilding their many battered economic sectors and working to eradicate budget deficits and get back to business as usual.

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