What is the IMF telling Eurozone about fiscal and banking unification?

International Monetary Fund Managing Director Christine Lagarde delivers remarks at the U.S. Chamber of Commerce in Washington. (September 19, 2013, OIMF Staff Photograph/Stephen Jaffe).

International Monetary Fund Managing Director Christine Lagarde delivers remarks at the U.S. Chamber of Commerce in Washington. (September 19, 2013, OIMF Staff Photograph/Stephen Jaffe).

The International Monetary Fund questions the efforts of the European Union to establish effective fiscal discipline policy instruments and a smoothly functioning banking union in the euro area. In a survey entitled “More Fiscal Integration to Boost Euro Area Resilience”, the Fund analysts observe that “Crisis exposed important gaps in architecture of the euro area”. To cure this they suggest “Strengthened fiscal governance and cross-country insurance mechanisms”, while they insist, that the Banking Union in order to be credible, needs urgently a “common fiscal backstop”. In total they have four suggestions to make, three for the long run and one for immediate application.

In detail, this IMF analysis proposes three new policy tools to secure effective fiscal discipline in the long run. They suggest that, to this end, a good start will be the timely launching of such a policy package. In the short run they insist that the Banking Union in order to be credible, apart from the Single Supervisory Mechanism and a Single Resolution Mechanism, needs “a firm and early commitment to establish an adequate backstop to anchor confidence in the banking system”. They elaborate a bit further and say, “While some of the insurance against banking accidents should be funded by the industry, a common backstop for the recapitalization, resolution, and deposit insurance would contribute to reducing the risk of contagion”. In reality they propose more taxpayers’ implication in saving failing banks. No wonder why the IMF is renowned as the best friend of banks.

IMF analysts before coming to those conclusions described accurately the unfolding of the Eurozone crisis after 2008. In this process they underlined that the “problems arising in banks raised doubts about sovereign creditworthiness and in turn sovereign stress aggravated the pressure on banks’ balance sheets”. These were the cases of Ireland and Greece respectively, while Portugal, Spain and Italy suffered of both illnesses albeit in varying degrees. Concluding its fact finding endeavour, the IMF notes that, “The approach taken so far—dealing with crises after they occur—has been costly, not only in terms of direct financial assistance, but also in terms of lost output and increased unemployment”.

The fiscal front

Focusing on the latest efforts of the European Union to cover the institutional gap of the Monetary Union with the “two pack” and the “six pack” Directives, the IMF believes they are not enough. To accomplish a well-functioning fiscal union, the Fund has four suggestions. All of them are meant to secure the long term ability of Eurozone to face crisis and accidents; the last one however is designed to cover the institutional gap of the Banking Union, as it is currently under construction and consequently, of an urgent character.

The four suggestions

The four suggestions are the following: Better oversight of national policies and enforcement of rules, increasing risk sharing with cross-country fiscal insurance mechanisms, borrowing at the centre and last but not least, a fiscal backstop for euro area banks. Of course those suggestions go beyond the current political realities in Eurozone around a possible unification. Borrowing at the centre sounds already as politically too much for Eurozone’s 17 member states. The same is true for the cross-country fiscal insurance mechanism backed with a “euro area-wide rainy day fund, a common unemployment insurance scheme, or a budget for the euro area”. In any case this is what the IMF proposes.

As for the first and the last suggestions there is more to say, than briefly abolishing them on political grounds. The first suggestion asking for better oversight and stricter enforcement of rules is not very far away, from what the Eurozone has already decided with the “six pack”. To be reminded, those six Regulations go as far as to institutionalise central approval of member states government budgets, before they are submitted to national Parliaments. The Commission’s green light is a prerequisite. In view of that, the IMF accepts that “the design of fiscal policy has improved”.

What about our beloved banks?

Now, let’s pass to the last and most urgent suggestion the IMF addresses to Eurozone’s political leadership, namely “fiscal backstop for euro area banks”. This is equivalent to suggesting that Eurozone taxpayers should accept to cover a large part of bank resolution and recapitalisation cost. Seemingly the authors of this IMF study didn’t have the time luxury to know what the President of the European Central Bank, Mario Draghi, proposed last Monday.

As the European Sting observed last Tuesday Draghi proposed the following breakthrough novelty in enacting the Banking Union, “until the resolution fund is fully financed, it should be able to borrow from other sources, including national ones, to ensure that properly-funded resolution is an option from the start”. Putting together what Draghi has said in the past and this latest statement, what he proposes here is that at an initial stage, the resolution fund should be able to borrow not only from the European Stability Mechanism, but also from those governments in the territory of which the bank accident occurs. This is a double fiscal backstop in lenders’ resolution and recapitalisation: once through the ESM and a second time directly, through national governments’ contributions.

All in all, it is obvious that this IMF study sounds as ‘laboratory’ like in suggesting a complete fiscal unification of Eurozone and common sovereign borrowing. It ignores the prevailing political mood in Eurozone, with Eurosceptic and extremist political formations gaining momentum. As for the construction of the Banking Union, the current situation is far from clear. A lot will depend on the political developments in Germany around the formation of the next government, to be presented sooner or later to the Bundestag.

There is another possibility, however, over the targets that this IMF survey is aiming at. Probably its authors, knowing the political limitations of Eurozone, are trying to exploit and pronounce them in order to undercut somewhat the global role of the euro money.

 

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

European banking stress tests 2014: A more adverse approach for a shorter banking sector

The Japanese idea of ‘chowa’ – and how Asia can thrive in the future

We need to talk about how we define responsibility online – and how we enforce it

Big impact vs big exit: the social side of the start-up game presented at the WSA Global Congress in Vienna

What you need to know about the Sustainable Development Impact Summit

EU and China to do more in common if the global scene gets worse

Why Eurozone’s problems may end in a few months

Modern society has reached its limits. Society 5.0 will liberate us

Artificial Intelligence has a gender problem. Here’s what to do about it

The Commission tries to stop the ‘party’ with the structural funds

EU-Western Balkans summit in Sofia

This new way of understanding disease is changing medicine

7 amazing ways artificial intelligence is used in healthcare

“The Sea is vast as it admits all rivers”, Ambassador Yang Yanyi of the Chinese Mission to EU gives her farewell address in Brussels

Online radio and news broadcasts: Parliament and Council reach deal

Fragile countries risk being ‘stuck in a cycle of conflict and climate disaster,’ Security Council told

US-China trade war: Washington now wants control of the renminbi-yuan

Climate change and health: public health awareness in an international framework

Climate Change : An Already Health Emergency

In Gaza, UN envoy urges Israel, Palestinian factions to step back from brink of a war that ‘everybody will lose’

Will Eurozone be able to repay its debts? Is a bubble forming there?

EU readies for eventual annulment of the Turkish agreement on immigrants-refugees

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

2016 crisis update: the year of the Red Fire Monkey burns the world’s markets down

2030 development agenda: Major breakthrough for world of work

Youth unemployment: No light at the end of the tunnel

Somalia has ‘once in a generation’ gender equality opportunity – UN Women chief

A Valentine’s Special: we can never overdose on love

EU Leaders’ meeting in Sofia: Completing a trusted Digital Single Market for the benefit of all

Merkel, Mercedes and Volkswagen to abolish European democracy

EU Commission: Banking and energy conglomerates don’t threaten competition!

THE ROAD TO GANESHA

Italy can stand the US rating agencies’ meaningless degrading

Cyprus banks under scrutiny

Fed, ECB take positions to face the next global financial crisis; the Brits uncovered

These charts show where the world’s refugees came from in 2017 – and where they’re heading

EU to spend €6 billion on youth employment and training futile schemes

Eurozone: There is a remedy for regional convergence

To win combat against HIV worldwide, ‘knowledge is power’, says UNAIDS report

Energy Union: EU invests a further €800 million in priority energy infrastructure

Measuring consumer confidence isn’t useful anymore. Here’s what we should do instead

COP21 Breaking News_10 December: UN Climate Chief Calls for Final Push to Meet Adaptation Fund Goal Very Close to Target

While EU Open Days 2013 discuss the 2020 strategy, Microsoft shares a glimpse of EU 2060

How can we build a workforce for our digital future?

Environment Committee MEPs vote to upgrade EU civil protection capacity

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

Economy on a steady rise in Latin America and Caribbean region ‘despite international turbulence’ – UN report

Dramatic funding shortages a ‘severe catastrophe’ for people of Gaza: UN Coordinator

Frontline workers vaccinated in Uganda over Ebola fears, as top UN officials visit outbreak epicentre in DR Congo

Millions more migrant workers, means countries lose ‘most productive part’ of workforce

Girls groomed for suicide missions fight back against the extremists of Lake Chad

India’s economy is an ‘elephant that is starting to run’, according to the IMF

The right approach to addressing overcapacity problem from a Chinese perspective

Berlin favours economic and social disintegration in certain Eurozone countries

EU Commission spends billions without achieving targets

“Prevention is better than cure”: the main goal of modern medicine

More than 90% of the world’s children are breathing toxic air

Infrastructure around the world is failing. Here’s how to make it more resilient

Commission launches new tool to support digital teaching and learning in schools

Big world banks to pay $ 4.95bn for cheating customers; Is it a punishment or a gentle caress?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s