IMF: Toward a Fiscal Union for the Euro Area

Paper here;  summary here.

26 replies on “IMF: Toward a Fiscal Union for the Euro Area”

The first link is broken. But the full document can be read here:

It is interesting that they make reference to a proposal for a centralised common unemployment fund for the eurozone. It seems to me that this type of policy proposal should be front and centre to get the support of European citizens. The political conditions for transferring more fiscal sovereignty to the EU are completely absent at the moment. But mutualising social risk and offering a new social contract aimed at enhancing social protection for citizens would go a long way to building the necessary solidarity required for a political union.

There was a time when there was intense political debate on the future of the EU but the economic crisis in the euro area has subsumed all that, as it is now taken as read (at least by the ECB, the European Commission, the IMF and most commentators) that the survival of the euro entails fiscal union and a banking union to help offset the flaws inherent in a currency union in what is far from an optimal currency area. Yet the existing steps are already ‘stretching the political fabric’ to quote the IMF paper.

This is an interesting paper and the possibility of what it recommends being adopted is; zero!

It is based on a false hypothesis i.e. that the crisis in the Euro Area is due to a lack of political integration – as reflected by a lack of fiscal integration – when the reality is that it is a banking crisis generated by a premature leap to a single currency without the necessary regulatory and budgetary discipline safeguards being in place.

It is also, one may remark, a reflection of a French view of the situation.

Box 3 dealing with “legal considerations” states the following;

“While the EU legal framework allows for key elements of a fiscal union (e.g., a small central budget with own resources, a system of allocation and redistribution of resources, and the SGP to support fiscal discipline), the TFEU does not envisage common elements of fiscal policy specifically at the euro area level. In addition, it does not recognize the euro area as a separate entity, and the currency union lacks a legal personality.”

This is rubbish. The ECB is an institution of the EU and both have legal personality. Article 3.4 of the Treaty on European Union states; “The Union shall establish an economic and monetary union whose currency is the euro.”


The EZ relied on the markets to enforce discipline, with painful results. Now we will have some new institutional arrangements to provide this function, but only time will tell if they will work. If they don’t then the next stop will be a fiscal transfer union, and the IMF paper will become relevant. Perhaps the authors do not feel confident that the EZ’s stability and discipline arrangements are going to cut it?

@ skeptic01

The EU – not the EZ – made a serious error in thinking that one could establish a successful single currency without first creating a functioning single market in financial services. The markets simply did their job in making this evident.

Ministers for finance of the EU, and not just the EZ, are now facing the moment of truth in the context of establishing a belated “banking union” as has been pointed out to them in a recent presentation by Bruegel.

The IMF paper is unlikely to become relevant in any possible scenario. The mood in Europe is to take back powers from the EU, not to add to them.

As to whether a monetary union can function without a political – and fiscal – union, it seems to me to depend on the relative weight of the participants e.g. the UK and Ireland for many years. I do not think that Germany is politically capable of being the anchor on her own. As the reconciliation between France and Germany is why the euro exists in the first place, and they make up half the weight of the EZ, Berlin and Paris simply have to get their act together. It seems to me that they will.

To say that the Irish establishment has yet to wake up to the new reality would be an understatement.


to suggest, as the canadian goldman sachs guy, Carney, now heading the BoE, that German workers should finance a 23% structural unemployed Spain,

is just plain crazy.

I do not tell them what to do, but just: not one cent from my people for this nonsense.

@ francis

Box 4 at page 25 is of particular interest.


“Implicit Transfers. The rates charged on most crisis financing reflect the average cost of funding of creditor countries and the ECB’s lending rate and fall well below the market rates faced by crisis countries. In particular,
liquidity provision through the Eurosystem has allowed the reduction in foreign investors’ exposure to occur without a generalized liquidity or currency crisis. In order to give a sense of the magnitude of the implicit
transfer, we compare actual interest expenses for crisis financing with the hypothetical costs if (i) similar amounts had been raised by crisis countries at current long term yields, or alternatively, at rates reflecting fundamentals (derived from a model, as market rates might have overshot in the current context); or (ii) creditor countries had hedged their exposures at prevailing CDS rates to insure against the risks taken on their balance sheet. The implicit transfer is estimated at between €45 and €76 billion per year for Greece, Ireland, Italy, Portugal, and Spain (see table). Netting out the contributions by these countries to crisis financing, the implicit transfer by euro area net creditors ranges between ¾ and 1¼ percent of their GDP. These are rough estimates of the magnitudes involved. It is important to note, however, that they do not capture the potentially very large costs (longer crisis duration, lower output, and
higher unemployment) that could be associated with the current approach of ex post risk sharing.”

The continuation of “ex post risk sharing” is not an option. Neither is the solution posed in this IMF paper, apart from the minimal movement on a banking union and final grudging acceptance of the need to establish a genuine single market in financial services cf link to Bruegel paper.

@ francis

You may also find these links of interest (H/T Open Europe).

Page 44 of;

Politicians in my experience are never willing to act except when it is made unavoidably evident to them that it is in their collective self-interest to do so. What this interest is has been lost in the fog of immediate crisis management for the past five years. This phase now appears to be ending.


I hope you’re right, but just a tad worried that after the present crisis is over we will see a return to profligacy and imbalances.

@ skeptic01

Sufficient unto the day…!

In any case, that is not where the problem lies but in the populist lack of vision in many politicians, the best example I can think of at the moment being the position of the winning CSU politician in Bavaria, Seehofer, who is making a motorway toll payable only by foreigners (!) a condition of his party’s participation in any grand coalition, either with the SPD or the Greens.

This is, of course, completely at odds with basic EU law and is unlikely to happen. It is, however, a good example of the political mood in Europe which shows how unrealistic, not to say naive, the IMF paper is.


Thanks for the box and the Allianz link.

What the IMF paper at least does, is that it spells out the cons, namely the massive moral hazards involved with all those steps, and why none of it will happen, therefore.

What we learned this year is that as soon as the immediate crisis is over, everybody goes back to what he did before, dam any treaties signed.

Filthy rich Cyprus tried to push their debt onto others.
A Portuguese socialist supreme court finds, that you can not cut the oversized public wages.
In Spain generous pensions are just temporarily frozen, and whatever they do, a 23% “structural” is not what we call in normal countries “unemployment”.
Italy returns immediately to the usual political chaos, and reneges the taxes to keep within the 3% limit. Greece will continue to throw a tantrum every quarter. Ireland will not evict people who didn’t pay the mortgage for 3 years.

And I will keep to my apprenticships, we even have one for vending machines fillers, ROFL, and my stupid german savers will take their interest losses, because they are more afraid of the alternatives.

The central bank chief from Poland is even encouraging his banks to gang up on foreign bank subsidiaries–business.html

Everybody will pay for his own nonsense, because in the very moment we start ANYTHING, everybody will draw up his wishlists for what he feels entitled to. I would like a real estate union : – ) When you look at page 115, it becomes clear, that everybody can pay for himself.

And some countries will continue to pay a risk premium for the risk they are through their behavior. I do not want any further integration with people who keep a Berlusconi, convicted to 4 years for financial fraud, in his senate office.

When you take a look at wiki/Vignette_(road_tax), you will find, that we basically now pay in all neighbor countries to the south and east road tax, and of course that can be made compatible with EU law. Just demand it from everybody, and reduce the car tax equivalently. Whether this a wise thing to do, is a different question.

Seehofer is just playing to the growing frustration here, that it is always us Germans paying.

@ francis

I am an agnostic in all these matters – and not denying that you are correct – except in relation to one; Germany is not the only country paying and the major political error by Merkel, in creating the impression that it is, has, by sheer luck, not been confirmed by the German electorate.

Traversing a crisis in terms of income foregone is one thing, doing so by seeing one’s standard of living collapse is another.

Developments in Greece are particularly worrying.

@ francis

By the way, this paper by staff of the Irish Central Bank is also pertinent to this thread.

What it fails to recognise is that the”funding” of Irish banks referred to involved the banks in question leveraging their lending into the stratosphere while the Irish regulatory authorities were asleep at the wheel.

You will note that the instrument of a “Pfandbrief” was also introduced to the Irish lexicon.

The bit I liked best was the following;

“The distance between countries is a key factor driving banks’ cross-border flows [Portes and Rey (2005) and Buch (2005)], with greater distance negatively impacting the flow of bank funding between countries.”

This seems to me to be an example of cumulative referencing academic error. The distance between Ireland and the UK is, after all, that between a green island and one of the world’s leading financial centres – the City of London – where some 75% of the financial services of the EU as a whole are transacted, if I am not mistaken.


where did I or Merkel ever say we are the “only” one paying? Please direct citation. What I remember is that I repeatedly said here, that we are only 27%, and that the others will be angry as well, if you do something stupid and criminal.

The IE CB statement is indeed remarkable for a) pointing out that the fraction of German banks was pretty small, and it was US & UK banks which were bailed out, by the actions of your Irish central bank and government. and b) their near total lack of acknowledgment that they failed their role in this bubble.

@ francis

“Seehofer is just playing to the growing frustration here, that it is always us Germans paying.”

Are you saying now that this “growing frustration” does not exist? If so, I am glad to hear it. Or does the comment apply only to the issue of road tolls?

With the exception of Finland, I am unaware of any other creditor country with an equal level of public disenchantment with the euro.

However, let us look on the bright side! The economic reality is as set out in the Bertelsmann paper. The likelihood is that a coalition will be agreed between Merkel and the SPD, especially now that Steinbrueck is withdrawing from active politics, and the change in political direction on significant issues relating to the management of the German economy will take place.

On the subject of the intent of countries to recover loaned funds on behalf of their banks, this was certainly never confined in the Irish public mind to German banks. As to whether Ireland is in a special situation in this regard, Trichet was at a pains to point out in a recent interview, that all countries were treated equally in the matter of not letting any bank fail.

I have no argument with you on your point b). The system failed but nobody in the system was actually responsible.


Grummel, where I live “playing to” means articulating ground waves, which do exist, but are not articulated (yet) fully in the printed public.

I want to remind you again, that what you, and many other onlookers in this blog read is the Spiegel and similar outlets, which however only address about the left 10% of the German public, Baron Münchausen caters to, I would call the pseudo intellectuals, not the real left.

Please get this into your mind.

I think you forget a little bit this artificial blond guy in the Netherlands.

And the results in Austria, where the pro Euro parties ÖVP and SPÖ barely got above 50 % together today.

I analyzed the results here, in my little quarter here the CDU only about 15%, so it is not exactly representative : – )

For Saxony as a “land” the result is CDU 43%, Communist 21% (who are against any further euro whatsovever), the only Eurobonds SPD + Grüne below 20%, and the accumulated right of the CDU (above 1%) : 14.7%, and it does not add up to 100%, because I left out Spartakists, Maoists, US driven LaRoche and other tiny weirdos, who all want to burn all banks to the ground.

Maybe you can now enjoy Weidmanns

All those dreams, we had, of more union are history now.

Done in by the continued crazy behavior of the GIPSI.

The Kretschmans are now going after the Trittins, and the Seeberger in the SPD, and Eurobondies are Pariahs.

This is the reality.

@ francis

We could bat this ball around indefinitely without coming to any conclusion.

A more productive approach might be to consider this recent speech by a member of the Executive Board of the ECB.

Two extracts;

“I welcome this proposal in principle. But I think that, during the build-up phase, clarification is needed on what will happen if there are exceptional circumstances which lead to the fund’s resources being exhausted. The proposal is unclear here. In my view a credible backstop is essential to ensure that resolution costs can be separated from national budgets.”

“If the backstops are not there, I fear that the exercise will create a lose-lose situation for the banking sector. If the results reveal only small capital needs, markets will think they have been fudged to save public money. If they reveal significant capital needs, markets will question how they will be filled, creating uncertainty. Either way the confidence boost we hope to gain from the assessment will be lost.”

There are clearly critical choices ahead. The European hesitation waltz has to come to an end.

As to the interview with Weidmann, I would say simply that he is an expert at catching the political wind. Whether this is an appropriate role for the head of a central bank, I do not know. Maybe in the special circumstances that apply in Germany in terms of the institutional balance. Most central bankers cannot keep out of the political arena even if it is their most sincere desire to do so.


of course a Luxemburg banker likes to make his banks whole at the cost of the working man in Germany and other places. They were the only guys who voted for the cyprus attack. We do not forget this.

The choices have been made.

Cyprus is THE template.

Everybody pays for his own continued folly.

From the Summary:

“a fiscal union would reduce the incidence and severity of future crises by strengthening fiscal discipline and providing a minimum amount of insurance against deep recessions.”

Future crises? That’s nice. Strengthening fiscal discipline? Like you mean, total state spendings should NOT exceed total tax revenues Well, the best of luck with that one!

“Contrary to expectations, the launch of the common currency did not make euro area economies more similar over time or more resilient to shocks. Real convergence lagged expectations, and country-specific shocks—home-grown or not—remained significant and … … more frequent than anticipated … ”

Contrary to expectations! You mean that the so-called ‘architects’ got it wrong? Its not like the flaws were not pointed out at the time, now was it? What does this say about the arrogant behaviour of those so-called ‘architects’? So, how do you fix a defective structure? With extraordinary difficulty – that’s what! Well, best of luck, again, with that one!

“More frequent than anticipated?” Say no more, please!

“At the height of the current crisis when problems arising in banks raised doubts about sovereign creditworthiness,”

Its the banks that became insolvent – through the rank incompetence of the senior executives that were in charge, and who made the decisions about how the bank borrowed its funds (for onward lending), and the warranties and representations those executives made to their commercial lenders. But, of course, that incompetent behaviour was not part of the bad outcome? “OK, pull my other leg, its got a bell on it!”

” … [t]here were few market forces to prevent and correct growing imbalances: once a negative economic shock hit, … … and labor mobility remains limited within the currency area.

” … [t]here were few market forces to prevent and correct growing imbalances:”

Well, well, now. So that Holy Grail of the Chicago School, that all seeing, all correcting, infallible, omnipotent Free Market is actually a complete bucket of slop! Who’d have known? Educated imbeciles comes to mind. And pretty hazardous ones to boot!

” … prices and wages did not adjust downwards to compensate for the losses in competitiveness …”

Did not adjust downwards? How does deleveraging prices and wages impact on a consumer society? Yeah, I thought so! Wages have either stagnated or declined. But prices? I fancy they have increased, and will continue to do so. And God help us when those energy shocks start to roll in. I have 2015 penciled in. But lets just wait.

“labor mobility remains limited within the currency area.”

Have these authors got even a single functioning neuron between them? Seems not.

“.. … [e]ffective crisis management has often gone hand in hand with far-reaching long-term reforms,”

Well, at least they got this one correct. Reform worked fine until the financial interests started shredding the ‘reforms’ – and what happened then? BOOM! And no one saw it coming?

@ francis: “Everybody pays for his own continued folly.”

True – in past times. But not now. Now, the little folk pay for the big folk’s folly! Things will get ‘interesting’ – just not soon.

@ francis

Also pertinent to this thread a masterful presentation on the situation confronting the EU – and not just the EA – by the head of the IMF European Department (hat tip Michael Hennigan).

No mention of either political or fiscal union!

The manner in which Ireland is disengaging from the company of the other peripheral countries may be noted; except in relation to levels of debt and the continued borrowing that is adding to it.

@ francis

More from the “Luxembourg banker”.

Austria also had a near miss!

“Dabei sind sich Fachleute einig: Ein Ausstieg aus dem Euro wäre für die Exportnation Österreich fatal. Ein neuer Schilling würde massiv aufwerten, die Wirtschaft würde hart getroffen, Tausende Arbeitsplätze wären gefährdet. Die Schweiz hat – entgegen anders lautender Gerüchte – mit dem harten Franken ein ganz ähnliches Problem. Rot-Schwarz hat dieses Feld den Populisten überlassen.”

Given developments in the US, now is not the time for grand-standing on this side of the Atlantic.

Financial services relieve many of those who avail of them, of much of their wealth.

There is no superior intellect at work, except to lie bare faced and to disguise the pig with lippy. The attempts to keep Ireland out of the EU and then the EZ were to ensure that the pool of those who are served is as large as possible. Germany does not trust Anglo-Saxon banking. Both Angles and Saxons are or were in Germany! Code for another “race” perhaps? One that cannot be named? Germany have a healthy manufacturing sector, whereas those who have access to massive finance do not, despite that “advantage”? Could this be coincidence? I leave it to those with a superior intellect ….

@ All

The pace of the debate – if not the progress – on Europe’s proposed banking union is picking up dramatically.

This extract in particular from the latter.

“From a financing point of view, governments are actually in a similar situation as banks because they have liabilities (public debt) whose maturity is usually much shorter than their assets, which consist
essentially of the present value of future tax revenues.”

Inasmuch as the sovereignty of nation states is failing, on the collapse of fiat money, beginning with the Emerging Market Currencies, CEW, and Emerging Market Bonds, EMB, nannycrats will increasingly meet in summits and work groups, to renounce national sovereignty, and to establish regional sovereignty, where monetary, fiscal, and economic policies will be directed by statist public private partnerships of banks, businesses, labor organizations and governments, all for the goal of regional sustainability. The IMF is showing the way forward, as the centerpiece statement of its position paper More Fiscal Integration to Boost Euro Area Resilience, dated September 25, 2013, calls for better oversight of national policies and enforcement of rules: “Going forward, reinstating fiscal discipline and reviving market discipline may require stronger involvement of the center in national fiscal decisions.” A One Euro Government is coming soon, it will be a United States of Europe, with a great democratic deficit. The periphery nations, will exist as hollow moons revolving about planet Brussels and planet Berlin. While Greeks cannot be Germans, all will be living as one, in common debt servitude to centralized task masters as they direct a Eurozone Fiscal Union.

Liberalism featured trust in the world central bankers for investment gain. Now in authoritarianism, specifically out of waves of economic and political turmoil in the Mediterranean Sea nation states of Portugal, Italy, Greece, and Spain, people will come to trust in the word, will, and way of sovereign regional leaders, that is statist nannycrats, for regional security, stability, and sustainability, as communicated in bible prophecy of Revelation 13:3-4.

Doug Noland penned that liberalism as the age of wildcat finance; an epoch where bankers of all types fiercely strived to outdo one another to generate the greatest investment results, and where Ben Bernanke fathered credit easing.

But now with Jesus Christ, operating in dispensation, that is the administration of all things economic and political, as presented in Ephesians 1:10, the world has pivoted from liberalism to authoritarianism, where Angela Merkel fathered debt servitude with Greek Bailouts I, and II, and where she in calling for More Europe, laid the groundwork for a soon coming One Euro Government.

Authoritarianism is the age of wildcat governance, where leaders bite, rip and tear one another apart, in their struggle to become top dog leader; these will increasingly rule regionally, in diktat.

Peter Schwarz of WSWS reports on the emergence of wildcat goverance and its diktat in article Italian Government Survives Confidence Vote.

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