The European Union is preparing a proposal for a European Monetary Fund as leaders try to draw lessons from Greece’s fiscal crisis.
"The European Commission is willing to make a proposal on this instrument relating to a possible European Monetary Fund" before the end of June, Amadeu Altafaj, spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn, told reporters in Brussels today. "There is a clear sense of determination to act."
The financial turmoil sparked by soaring Greece’s budget deficit has highlighted the absence of a single euro-area finance ministry that could tackle the default of a member state or force a country to cut its deficit before it got out of hand.
German Finance Minister Wolfgang Schaeuble said yesterday that the euro region should consider creating an organization with powers similar to the International Monetary Fund.
Former U.S. Federal Reserve Chairman Paul Volcker said in an interview on March 6 that the lack of political union to back up the European Central Bank is a "structural crack." Billionaire investor George Soros said on Feb. 22 that the common currency could disintegrate if the E.U. doesn’t act.
Altafaj said the commission, the E.U.’s Brussels-based executive, is discussing the idea with the European Central Bank and the 16 countries that use the euro. He said the proposal is "at a preliminary stage" and declined to give details on the possible structure or funding of the proposed entity.
"We have to look at how things develop; what kinds of instruments will be set up to do this," Altafaj said. "It’s all a work in progress." He said Rehn will report on the discussions at a commission meeting tomorrow.
Proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels. The EMF could ease the disruption caused by the failure of a euro member to pay its bills by offering investors new EMF bonds in exchange for the defaulted securities, they said. Investors would be required to take a "haircut."
"Setting up a European Monetary Fund is superior to the option of either calling in the IMF or muddling through on the basis of ad hoc interventions," Mayer and Gros wrote in an article in the Economist last month.
Altafaj said the proposed European fund would not compete with the International Monetary Fund as it would focus on the euro region. He said the IMF has made an important contribution to helping the situation in Greece.
"We’ve had this crisis in Greece and want to make improvements in light of what we have learned from that," Altafaj said. "There is clear will within the euro-area member states and the European Central Bank to learn lessons from what happened and to take measures."
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