Proposals for a European Monetary Fund

There are lots of stories in today’s press about the German-backed proposal to introduce a new European Monetary Fund to help out EU states in difficulty. Setting up the fund would require a new treaty, which would take a long time. So, on the face of it, this isn’t about helping out Greece, though it could turn out that Greece becomes the “test case” for how an EMF would operate.

One aspect of this story that I’m having some trouble understanding is why the IMF cannot be used to assist an EU member. The Irish Times Cantillon column explains the argument as follows. Current circumstances imply that:

The only possible lender of last resort is thus the International Monetary Fund, but an IMF intervention in a euro-zone economy would be a mortal blow to the credibility of the euro.

Ok, here’s a question. What does “mortal blow to the credibility of the euro” actually mean? And if it means something concrete (and bad) why does an IMF intervention produce this bad outcome while an EMF intervention does not? Answers on an electronic postcard …

52 replies on “Proposals for a European Monetary Fund”

The German government insists that direct bailouts are not allowed under the Lisbon Treaty, but they are also worried about the reputational damage to the Euro of a default. So the idea of an EMF was spun into the media yesterday and aparently has the support of both the German finance minister and the Chancelor (it is off the headlines in Germany today).

It was interesting to listen to Daniel Gros (CEPS) on Morning Ireland this morning, whio published a note, co-authored with Thomas Mayer (Deutsche Bank).
More here:

Daniel Gros does not think that a new treaty is necessary. He also has some interesting ideas about incentivising good behaviour, something that will be pushed hard by Germany.

I also note this morning that Angela Merkel is already calling for ‘changes to the treaty’ to set up this European IMF-type fund (EMF).

They are also calling for the EU to be able to dictate public sector wages in member states as part of setting up a EMF. A shame they are not calling to dictate the pay in other sectors. I wonder why that is (tongue in cheek)?

Now why would you want to set up something that, in effect, already exists ( i.e. the IMF)?

Mortal blow = my ego has been slightly damaged?

There are too many politicians involved in trying to sort out problems (e.g. of an economic nature) that they are not qualified to deal with and too many politicians are simply egos with arms and legs sticking out.

Anyway, talking so some friends of mine who were on holiday in Greece last year, I am convinced that I have the answer to their problems over there: a solution that would also enable Germany to help bail them out without making it too overt/direct and upsetting the German electorate.

Simply introduce a ‘towel tax’. A cash tax of €10 levied on anyone who puts their towel on a sunbed by the pool before the end of the official breakfast time at the hotel/apartment complex in Greece.

This would not only raise vast amounts of cash to help Greece with her problems but it would also be a good cultural fit over there as it is ‘cash guv, wink wink, say no more”.

We could even have an equivalent in Ireland – only here, it would probably need to be called a ‘flannel tax’.

They’re probably more fearful of what dosage instructions would come on any IMF medicine…

[…] Karl Whelan in Irish Economy is on to it too There are lots of stories in today’s press about the German-backed proposal to introduce a new European Monetary Fund to help out EU states in difficulty. Setting up the fund would require a new treaty, which would take a long time. So, on the face of it, this isn’t about helping out Greece, though it could turn out that Greece becomes the “test case” for how an EMF would operate. (link to article) […]

@Joseph – last week a number of German politicians recommended that Greece should sell a few islands. Such good advice was not well received in Greece where they are still looking for compensation for war damages from Germany.

More seriously, I noted a few times that any bail out, and a EMF would be a vehicle for bailouts, would come at a price.

@ Karl

could you ever imagine the US letting the IMF in to help, say, California or Michigan?

The EU ultimately wants to be a long term economic “superpower” the way the US is and the way China is becoming. Economic superpowers don’t go to the IMF for help. The more surprising thing is that its taken this long to bring this sort of institution into being. My guess would be that the Germans were always reluctant to do it because they knew they’d probably end up footing the bill, but its difficult to deny the rationale behind setting one up now.

The IMF is best suited to assist with refinancing public debt in a member country. The notion that an IMF intervention in an eurozone country would undermine the credibility of the euro is flawed since responsibility for fiscal policy rests with national governments. The Stability and Growth Pact has failed to ensure fiscal discipline in the eurozone countries. It is not obvious that a new institution such as an EMF which would take in any case time to establish would be more successful.


Individual EU member countries are members of the IMF and not the EU or the Euro Area. It would be Greece or any other EU or Euro Area member country and not the EU or the Euro Area requesting assistance from the IMF.

‘Ford to New York: Drop Dead’ did not appear to do mortal damage to the dollar.

@ Iulia Siedschlag

I didn’t mean the EU literally going to the IMF, but that would be the perception of an EU member being forced to go to the IMF for help rather than the EU itself. I’m also not sure what the likes of China and the US etc would think about a reasonably rich Eurozone country having to get bailed out by them while the rest of the EU sat idely by.

@Eoin – “the Germans were always reluctant to do it because they knew they’d probably end up footing the bill”

It’s difficult to see that happening in the present political climate in Germany.

I had assumed that one of the reasons they were also making noises about giving the EU the power to be able to dictate public sector wages in member states as part of setting up a EMF…………… was a prelude to saying to each EU country “make some savings and raise some more taxes so that you can all make a substantial contribution using that money”.

As I said on my blog this morning, if we think NAMA and bailouts here are nothing short of a grand heist of public money into the private sector, wait until this EMF gets going.

If you wonder why they need so much money, you have to wonder what might be going on that we aren’t aware of (maybe even the Irish government isn’t aware of – not big/important enough to be considered stakeholders).

Just how bad is it out there?

I agree with you. It is interesting to note that the Asian countries in Asean also proposed (and I believe implemented) some sort of first-line funding agency for their economic area, backed by China and Japan. The idea being that for some countries turning a drama into a crisis causes too much collateral damage and what is required is an external auditor to enforce a bit of discipline.

I also think there is a useful function to be performed in having an IMF for social democracies… in addition to this, pushing a reform agenda that encourages greater integration and avoids beggar-thy-neighbour policies. I can’t imagine the EU were all that impressed that the IMF prescription for Latvia included a 40% devaluation. It might have been right in the short-term for Latvia, but longer-term? And for the rest of Europe?

Be interesting to see what the British and non-ERM currency countries think of this and if the ERM II countries will be included…

Yes the IMF is fit for this purpose. But, you’re not thinking like a powerful government.

An EMF would give Germany (and the other more powerful members of the EU) much more flexibility than the IMF. It would allow them to more easily set

a) who gets bailed out
b) the size of the bailout, and
c) the terms attached to the bailout.

Why would a government like Germany cede this power and influence to the IMF’s professional staff when it could have much more control over the process?

Dunno if this is something the contributors would normally see, but this column is in this month’s Prospect:

“Crisis watch: Greece and the IMF
SIMON JOHNSON 24th February 2010 — Issue 168
Europe’s leaders are putting their personal ambitions before the welfare of struggling states like Greece. Time for the IMF to step in
Traditionally, “You should go to the IMF” is not something you would say to a friend. Over the past few decades, the IMF has become associated with excessive fiscal austerity and extreme political insensitivity. Countries borrowed from the IMF only when all else failed and when there was no other way to pay for essential imports. For Iceland in autumn 2008, for example, the only alternative to IMF financing was to eat locally sourced goods—mostly fish.

But the IMF has changed a great deal in recent years under the auspices of Dominique Strauss-Kahn, its managing director. Strauss-Kahn, a former French finance minister and possible Socialist candidate for the French presidency, has pushed through changes that allow the IMF to lend without conditions in some circumstances, and to give greater priority to protecting social safety nets. He has also moved the Fund away from its obsession with fiscal austerity measures (a big mistake—with traumatic consequences—in Indonesia and South Korea in 1997).

Greece undoubtedly has serious problems today. The great opportunities offered by European integration have been largely squandered. And lower interest rates over the past decade— brought down to German levels through Greece being allowed, rather generously, into the eurozone—led to little more than further deficits and a dangerous build-up of government debt.

Germany and France—as de facto EU leaders—are haggling over a support package, but they have made it clear that Greece must slash public-sector wages and other spending. Greek trade unionists are out on the streets.

If Greece still had its own currency, everything would be easier. As in Britain since 2008, the Greek exchange rate would depreciate sharply. This would lower the labour costs, restoring competitiveness while inflating asset prices and helping borrowers who are underwater on their mortgages and other debts.

But, with Greece and other troubled eurozone economies (known as the PIIGS: Portugal, Ireland, Italy, Greece and Spain) having surrendered monetary policy to the European Central Bank (ECB) in Frankfurt, their currencies cannot fall in this fashion. So Greece—and arguably the PIIGS more generally—are left with the need to curtail demand, lower wages and cut the public sector. The last time we saw this kind of precipitate austerity—when countries were tied to the gold standard—it contributed directly to the onset of the depression in the 1930s.

This is a situation tailor-made for the “new IMF.” Since early 2009 it has had greater resources to lend to troubled countries, to offer a form of international circuit-breaker when it looks like the lights might go out. The idea is not to prevent necessary adjustments but to spread them over time, to restore confidence and serve as a seal of approval on a government’s credibility.

The IMF was created in the waning days of the second world war, as a US-European partnership. Europe retains strong representation at the Fund, and has always chosen its leader—most emerging markets complain that Europe has far too much say in how the Fund operates. Yet at this time of growing crisis, while there is still time to act, the Fund is confined to the sidelines.

This is in part because the German chancellor, Angela Merkel, manoeuvring to ensure that a German is the next head of the ECB, does not want the Fund to become more involved in euro-zone policies. The IMF might reasonably take the position that ECB policies have been overly contractionary—resulting in a strong euro and very low inflation—and are no longer appropriate for member countries in the midst of a financial collapse. If the IMF were to support Europe’s weaker economies, this would challenge the stance of Frankfurt-dominated policymakers.

But the real reason is simpler. When French president Nicolas Sarkozy put forward Strauss-Kahn to run the IMF, he meant to park a rival in a faraway place. Then the financial crisis hit, and Strauss-Kahn was propelled to centre stage.

With France’s next presidential election in 2012, the last thing Sarkozy needs is for Strauss-Kahn to play a statesman-like role in saving the eurozone. We will hear all kinds of excuses from EU sources for excluding the IMF: “The Fund is too American,” “Europe must resolve its own problems,” and “the IMF is not appropriate to our circumstances.” Given the magnitude of the Greek crisis, they will all ring hollow.

Sometimes history is driven by forces beyond our control, and sometimes by sheer chance. And at other times, like now, much that hangs in the balance is affected by the personal and short-term tactical concerns of people running for election.

The EU’s leaders will try hard to keep the IMF at bay. This is not good news for Greece—or for anyone who cares about global financial stability.”

U R correct.
The IMF is a way to make money for the banks behind it. The EU will want to ensure that the income earned stays where it belongs and that interference is minimized.

The UKUSA alliance listen in on everything particularly economic. We use that info to beat you europeans to business deals etc. IMF terms enable lots of access, due diligence etc!

The EU will be very gentle with Greece, but it may involve rubber gloves and a roto-rooter, as our cousins say. The lack of an EMF merely shows poor strategic thinking, possibly because the Germans do not dominate the EU. We really do need contingency plans to invade Turkey …..


The comparison of the EU with the US is misleading. Greece asking for assistance from the IMF is not equivalent to Michigan asking for assistance from the IMF. The reality is that we are far from an European United States. Why was it OK for EU member countries such as Hungary, Latvia and Romania to request assistance from the IMF and it would be wrong for Greece to do it?

@dealga – “Strauss-Kahn, a former French finance minister and possible Socialist candidate for the French presidency”

Er, I think he left his socialist credentials way back there somewhere. I’m not sure he ever had any. A bit like Mitterand, the socialist party was a handy platform to get into power (and pur-lease……. don’t let me hear anyone trying to claim that Mitterand was a socialist).


You should take that point up with the former IMF chief economist who wrote the article – not me, the guy who just copied and pasted it!

@Pat Donnelly

What’s a ‘roto-rooter’?

It sounds jolly unpleasant.

My favourite saying from our cousins is: “Keep your eye on the donut, not on the hole.”

As for your comment – “The UKUSA alliance listen in on everything particularly economic”……. tis’ sad but true.

Many years ago I put in many a night shift having a listen and when I wasn’t in Cyprus listening to the baddies, I was in Cheltenham or Bletchley and you would be surprised at what ‘commercial interests’ we used to listen in to.


Sorry – not having a pop at you dealga! Just at the notion of any senior politician in the socialist party actually being a socialist. It’s just too funny.

The fact that the SGP was not sufficiently flexible to steer euro zone economies through the Great Recession is not in itself reason to regard it as a failure.

Rather, it probably represented the outer bounds of what could be politically achieved at the time.

However, the long term stability of the euro and indeed the wider EU depends on building on the SGP basis. We need a framework for fiscal cooperation – sort of a SGP II – which mirrors the monetary structures in place.

But an IMF intervention in a euro zone MS takes us in the opposite direction. It would undermine the credibility of the SGP in a way the Great Recession did not.

Thus, my answer to Karl Whelan’s question: an IMF intervention would not, in itself, disturb the functioning of the euro. But EU fiscal cooperation – a necessary step to the long-run success of an integrated EU economy -depends on credibility, and this credibility depends on EU solutions to EU problems.

@Karl Whelan

This move to EMF is very welcome – and Greeks in New York at the mo talking to IMF re expertise – so not a ‘mortal blow’ – EMF is simply further, if painfully slow and necessary strengthening of European ‘solidarity bond’ – President Sarkozy came out positive yesterday and Chancellor Merkel will also do so after her local elections. As we discussed previously on another thread – the ‘solidarity bond’ is essential to bringing more discipline and common sense to EU fiscal policies [PL. JF, and others have written on this here …. ] … one must simply sort out the policy particulars [members] within a local [European] universal ………… not an easy task …. but a necessary one the broader European Project – but effectively impossible if the ‘solidarity bond’ broken. Worth noting that this ‘intangible bond’ is one of our greatest resources at the moment in leveraginig our own way (if and when we get around to pragmatism and away from simplistic ideologues and cliques) our of our present ‘little’ difficulties.

The New York times on this is worth a read as well …………

Overall, this is good move for Europe, I 99% support it.

Also, it has been repeatedly mentioned that Sarkozy’s main political rival is head of the IMF.


Would you allow me discipline your children (if they deserved it)?
Keep it in the family!


Still if it required a treaty change and another referendum….you know I’m not so sure it would pass (well the first time anyway 😉 I think after the panic-stricken gratitude to the ECB got Lisbon II passed, perhaps the next year will see people take a different attitude to the euro……..
I suppose they’ll just figure out a way not to have a referendum…

@ Edgar Morgenroth

Daniel Gros does not think that a new treaty is necessary.

A new treaty will not be required but a few amendments are necessary, as the Maastricht Treaty banned bailouts.

I assume that what Merkel has in mind is to avoid problems with the German constitutional court.

@ Eoin

The EU ultimately wants to be a long term economic “superpower” the way the US is and the way China is becoming.

I don’t think so.

What is remarkable about the US, is that people from Michigan and California are so similar; ditto for China where the Han people comprise over 90% of the population.

@Sarah Carey

Without the European Solidarity Bond – the IMF would presently be attempting to fish us out of the depts of the North Altlantic Ocean. The time for Pragmatic Realism or Realist Pragmatism is NOW (-;

@ Iulia Siedschlag

“Why was it OK for EU member countries such as Hungary, Latvia and Romania to request assistance from the IMF and it would be wrong for Greece to do it?”

Well the difference would obviously be simple EU membership vs full on Eurozone membership. The EU is just a common trade area really, while the EZ is something far more complex and intertwined. While you’re right that we are far from being a United States of Europe, the common currency zone, the Stability and Growth Pact, and a single monetary authority/policy takes us quite a long way down that road economically and fiscally, although not politically. An EMF would simply bridge this gap somewhat with an institution bourne from political concerns, being used to provide economic stability at times of crisis. Obviously the danger would be that it could become run in a political manner, but the hope would be that it is structured with the same independence as the ECB is.

A new treaty will be required if the Maastricht Treaty’s “no bailout clause” (currently contained in Article 125) is considered to be an obstacle to the creation of a European Monetary Fund. There’s no way to get around that rule by “simple amendments” – simple or not, the only way to amend EU treaty rules is by a new treaty. It’s up to the Attorney General’s Office to decide if that treaty needs to be passed by referendum – I can’t see treaty change being politically viable if the answer is likely to be yes. Daniel Gros’ point is that the establishment of a EMF does not conflict with the no bailout clause, and therefore doesn’t require a new treaty. I’m not so sure about that – creating an institution that pools public funds for the purpose of aiding stricken Eurozone countries? Sounds very much like a bailout to me. There is however Article 122 which mentions that emergency aid can be provided if a Member State suffers from “severe difficulties” caused by “exceptional occurrences beyond its control” – whether this applies to a country that can’t manage its public finances properly is up for discussion.

@Michael Hennigan – Article 104 of the Maastricth Treaty states:
“1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments”. This has also been inserted into the Lisbon Treaty Art. 126.
I am not a lawyer but I don’t see anything there preventing a new body, EMF, that is not a central bank to be set up for the purposes of a bailout.

More than the constitutional court Merkel wants to avoid any more friction in her fractious coalition. The FDP won’t take a bailout of Greece.

@Sarah Carey – “Still if it required a treaty change and another referendum…”

Correct me if I’m wrong Sarah but I thought when we (well, everyone else it seems except me) voted ‘Yes’ last year that one of the things we were voting for was a ‘self-amending’ treaty and that we were never going to get another referendum in Ireland (or anywhere else for that matter) on changes regardless.

I would be amazed (but pleased) if there was a need to change the treaty and we actually got a vote on it in Ireland – that would cause a few sleepless nights to those walking the great corridors of EU power.

I won’t be holding my breath though. I’m pretty sure they know how to bypass us in the future.

@ Joseph/David

Well I voted for that treaty! All I’m sayin is IF we needed a new one, I wouldn’t be taking votes for granted….

@Sarah, Edgar

Don’t think we will need a new treaty on this one ……… as it stands it is more of a ‘signalling exercise’, but a welcome and very important one for those who ‘Think European’ …….. and down the line all this is necessary as recent events have demonstrated.

Ireland should lobby to have it located here…

Sure it would use up some of the empties, put a few more people paying taxes and you never know they could lodge the few bob in the banks while they are waiting for the phone to ring….

Didn’t we approve self-modifying treaties with Lisbon? (No requirement for a referendum for a change to existing treaties…).

The “self-modifying” bit – although it needs EU leaders to make a proposal as the treaty doesn’t have a mind of its own – is a part of the Lisbon Treaty, but it doesn’t remove the need for a referendum. It just means that instead of voting on a new treaty, we’d be voting to allow Brian Cowen or whoever to vote in the European Council to approve the proposal.

It’s puzzling to me and I have no doubt that a union formed from a “European Economic Community” can inveigle itself into so many social and foreign policy fields (not to mention defence) and yet pronounce its hands tied when the matter of mutual economic assistance and fiscal restructuring comes up.

At this point in the economic cycle, in whose interest is it within the Eurozone that the Euro not devalue? Why worry about the PIIGS getting out of the eurozone – just devalue the Euro (and promising to bail out the PIIGS will certainly give the Euro a good downward shove, you’d think)

As for the Greeks – having married in to an expat branch I’m aware of the fondness for the cash deal but if the striking state workers want to be paid they have to go to their Uncle Nick or Cousin Anita who work for cash and remind them that the money for their salaries comes from taxes.

The fact that Greek defence expenditures are amongst the highest in NATO as a percentage of reported GNP (and therefore is an even larger portion of the real – lower – number) isn’t helping either. The issue isn’t selling off islands in the Aegean, it’s for they and Turkey to quit tooling up to have a scrap over them one day.

My understanding is that IMF assistance is limited to those countries experiencing, or about to experoience, a currency crisis. We PIIGS will experience everything other than a classic ‘currency crisis’ despite the facts that our respective crises will have much to do with the currency we share.

@Peter “but it doesn’t remove the need for a referendum ”

We shall see in due course.
My reading is we won’t get any more referendums on EU things and people in Ireland are going to be left standing around with open mouths going “aren’t we supposed to have a referendum before they can do that?”

There was a very interesting analysis of the Greek situation by Sebastian Dellepiane Avellaneda in Saturday’s Irish Times:

Doesn’t go into detail on any solutions but makes the Polanyian point that “society” has its own “laws of gravity” to correspond to those imposed by financial markets.

He concludes: “Institutional stability sometimes implies a dose of institutional adaptation. This critical juncture should be seen as an opportunity for consolidating Europe’s great institution-building credentials.”

Although I tend to agree with the FT’s conclusion (which I quoted above), I’m glad (and surprised) to see the German finance minister getting this particular ball (i.e. institutional adaptation) rolling…

There is a real need to improve the governance of the eurozone. It is misleading to point to the IMF as a reason to make progress toward this objective.

Establishing an EMF will ultimately be a political decision. If Merkel and Sarkozy see some benefits in it, it will happen, and perhaps much quicker than Barroso might think. Both do not want the IMF to bail out Euro Zone countries (primarily for political reasons), yet bailouts might be required – the Greek Tragedy has exposed yet more flaws in the governance arrangement for the Euro. The Treaties prevent bailouts so some vehicle has to be found, and all the better (from the perspective of Merkel and Sarkozy) if this transfers significant powers to EMF.

@Edgar Morgenroth

Yes – it is already a political process in motion. Both German and French are stating opposing postitions internally for local political purposes [president vs finance minister in France – Chancellor vs B-bank and leading figures in Germany] ….. prob designed to give Angela a political ‘dig out’ re upcoming elections and unruly partner…. and President Obama in to lend moral support to Greece re the hedge-fund cabal attacks etc ……….. hopefully these mad credit-default-swaps will be outlawed internationally soon …….. bit of acceleration in EU Governance – no harm at all. I expect a bit of action post that CDU-Green alliance?


As someone who saw and warned, Mr. Johnson has credibility.

Yes, Asean has also made the same calculation – if nothing else, the “Washington-headquartered” IMF doesn’t ring well with their citizens being asked to bear the austerity (and a nation going bust will always require austerity!).

I don’t really see what the fuss is about, except maybe to disabuse the slackers that they might see money before the rules are set. The rules will be basically the growth and stability pack, parhaps with flexibility to the economic cycle. The money will be pooled and work on a guarantee basis beyond that, not much will really be required as the short-term debt requirements for states in trouble are low. As to when the institution are in place, it really doesn’t matter – that the plan exists and Germany and France have signed up to it is enough.


This has probably been answered in the foregoing posts, but it is purely politics. (Going on my recollection of an Economist article) there were a lot of people in the IMF, and the states more generally, who said that the euro wouldn’t work. So the eurocrats want to show ‘we’ can solve this problem on our own. Etc.

*we as in we the eurozone, in europe.

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