Economic prudence is better than a European rescue fund
The time to set up a rescue fund is during the fat years, not the thin years when they are needed. That’s why it is sensible to think of such funds now: by the time the wrangling over their format is finalised we may again have the financial fat to fill them ready for the next thin period.
So Germany’s finance minister Wolfgang Schauble has got his timing correct in proposing a European Monetary Fund for bailing out bankrupt countries. It is so controversial it will not be up and running until the present problem has gone away.
The financial regulators are similarly right in planning now to put a levy on banks during the next boom to provide the funds for rescuing them when they collapse in the next bust.
Even if a European Monetary Fund, an EMF, could be established quickly there is no point: if Greece could afford to join it would not need to. That may apply to some other Mediterranean countries too.
But part of the wrangling will be the cost of joining. Should a fund be insurance-based, with those countries deemed the greatest risks contributing most? Apart from larger contributions increasing that country’s risk, the ability to forecast which members would need to withdraw funds at future dates would be both contentious and difficult.
If members are allowed to borrow only what they have contributed then an EMF would be merely an enforced savings scheme and would leave a lot of capital tied up idly. The better use of a fund would be to lend money to the troubled member, but to require repayment in full, with interest – and not to get soft and write-off the loans later.
That is how the International Monetary Fund, has operated since it was set up in 1944, but as the world has the IMF, why does it need an EMF too? The suspicion is that a European fund would be there to give unjustified aid to its chums when the IMF has wisely refused.
There is already a European Central Bank, funded by all euro members (and in which the Bank of England is a shareholder), that could help troubled countries if its constitution permitted. Perhaps the EMF’s supporters hope their fund could borrow from the ECB, IMF or the latter’s in-house lender, the World Bank?
Who would join the EMF? The 16 euro member countries presumably, but should the other 11 EU members, including the UK, be expected to join? Asking them for a contribution seems unfair when the rigidity of the euro is part of the problem of countries such as Greece. Britain has avoided having insurance by having a currency to devalue.
An EMF is so far away on the political and economic horizon it may not be ready for the next financial crisis either, but instead of creating rescue funds, European politicians could do better to concentrate on preventing countries getting into trouble. Tight policing of the euro rules for economic ratios could have avoided the current pressures on Greece and other countries. Prevention is better than cure.
