Economists dismiss European IMF idea

Talk of a European version of the International Monetary Fund to rescue errant EU states is little more than a distracting sideshow, analysts and a key central banker say.

Economists dismiss European IMF idea
Photo: DPA

Rather than creating new institutions, the European Union (EU) should make the present framework of its currency union more credible, German central bank chief Axel Weber said Tuesday.

“Any other discussion is a sideshow which will distract from the necessary [fiscal] consolidation,” Weber told the central bank’s annual press conference.

UniCredit chief economist Marco Annunziata was equally sceptical about the idea of a European Monetary Fund (EMF).

“An EMF would be nothing else than an admission of failure, an explicit recognition that not only the SGP (EU Stability and Growth Pact) cannot enforce fiscal discipline but also that the eurozone would be unable to design any new mechanism able to enforce fiscal discipline,” he said.

As the global economic slump deepened in 2008, Brussels temporarily eased fiscal rules to allow governments to spend more on support for their struggling economies.

The result was swollen public deficits, increased debt and countries including Greece in such dire straits that financial markets turned on them. That in turn threatened the cohesion and credibility of the entire eurozone.

Sound national finances – a public deficit of less than three percent of gross domestic product and debt of less than 60 percent of GDP – were set as the bedrock of the European project.

The current pact for curbing annual deficits and compounded debt levels for EU countries is widely seen as a failure: 20 out of 27 members have breached the deficit limits.

In Germany, Europe’s biggest economy and a staunch defender of fiscal rectitude, leading politicians have floated the idea of an EMF.

Finance Minister Wolfgang Schäuble raised the idea of a new body in comments to a German Sunday newspaper, Welt am Sonntag. Germany has consistently refused to give aid to Greece for fear of sending the wrong signal and encouraging laxity elsewhere.

And on Tuesday German Chancellor Angela Merkel stressed that EMF plans would only work if strengthened “sanctions” were included to penalise wayward spenders.

“There must be sanctions,” she said of plans due to be outlined to the European Commission by the EU’s economic and monetary affairs commissioner Olli Rehn in Strasbourg, France.

According to German media reports, Berlin envisages the enforced suspension of European financial aid as well as the withdrawal of EU decision-making voting rights.

Merkel said plans for an EMF were being formulated to combat “situations of last resort.” They should not be perceived as an instrument that weakened the existing framework, she said.

Royal Bank of Scotland senior European economist Nick Matthews said the European Monetary Union “is at a crossroads, its sustainability will be a function of how fiscal policies are coordinated in the future.”

But some analysts have forecast that tighter rules would involve intrusive oversight of countries’ fiscal management and strict sanctions, two notions that have been strongly resisted in the past.

“There seems to be no other option than removing fiscal sovereignty of member countries,” Matthews warned. “The idea of an EMF should be seen in this context, i.e., as part of a set of ideas currently being discussed to reform EMU institutions,” he added.

The EMF idea goes to the heart of how the eurozone will develop, given efforts by some to make current rules tighter. Others however want politicians to have more influence over monetary policy.

Some economists underscore the danger of allowing EU states to draw comfort from the idea that they can get help in a crisis.

“It would create severe moral hazard,” by relieving pressure on governments because they would count on aid from peers if trouble arose, Barclays Capital economist Thorsten Polleit said.

Polleit also felt it would fuel inflation because the money would come from more government bond issues, which the ECB would be pressured to underwrite at least indirectly by printing more money.

Annunziata said an EMF would simply reproduce the IMF mechanism “under a new acronym – and it would need to be funded, whereas the IMF already is.

“Definitely a step backwards, not forward,” he concluded.

But Deutsche Bank counterpart Gilles Moec said the idea “would go much further than the SGP in creating credible incentives for fiscal discipline.”

Moec said an EMF would require countries with large deficits and debt to pay more into the fund. Beneficiaries would have to meet tough conditions, just as borrowers from the IMF have to, he added.

The proposal was first floated by Deutsche Bank’s chief economist Thomas Mayer and another economist, Daniel Gros.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.