The EMF as camel’s nose

by Henry on March 10, 2010

Charlemagne’s prediction 1 that the Greek crisis would have no substantial effects for EU integration is looking decidedly wobbly.

Radical plans for a European version of the International Monetary Fund to bail out crisis-hit countries would need a new treaty and the agreement of all European Union member states, Angela Merkel, Germany’s chancellor, has warned. Throwing her weight behind the proposals from Wolfgang Schäuble, her finance minister, Ms Merkel admitted that the European Union had lacked the tools to deal with the Greek debt crisis: “The sanctions we have were not good enough.” But she added that a full-scale negotiation of the EU’s 27 member states would be needed to set up a European Monetary Fund, which would be able to bail out eurozone members subject to strict budgetary conditions. “Without treaty change we cannot found such a fund,” Ms Merkel told foreign correspondents in Berlin yesterday.

Charlemagne attempts to shore up his position in a new post, suggesting that perhaps Germany is just blowing smoke to conceal its unwillingness to help Greece, but I suspect that his heart isn’t really in it. After all, the distinguishing feature of cheap rhetoric is that it is cheap. And, as was obvious at the outset, Germany’s trial balloon is quite politically expensive.

As Charlemagne himself notes (he seems to think this supports his position: I’m not sure why), the German proposal is resulting in howls of outrage from the president of the Bundesbank and Germany’s representative at the ECB. Both of them seem to be doing their very best impressions of 19th century gold-standard ‘suffering is good’ ultras – but anti-inflation fanaticism plays well with the German public, and Merkel is likely to pay a domestic political price.

The international price is likely to be higher still. Germany has sought for decades to resist French calls for EU-level ‘economic government,’ fearing that any such initiative would have substantial intra-state fiscal transfers and lax inflation policy trailing from its hindquarters. Now, not only are the camel’s hairy nostrils snuffling eagerly around the tent’s interior, but the front legs and the forward hump have found their way in too. What is surprising is that it is Germany, rather than France, which pulled the tent-flap open

This is not to say that we are likely to see an European Monetary Fund emerging (if by that, one means some Europeanized form of the IMF). A more plausible theory of Germany’s proposal is that it combines an effective recognition that some form of stronger economic governance is needed for the eurozone with an opening bid that is as harsh, punitive and limited in scope as possible, so as to minimize the distress of German taxpayers. But Germany’s proposal is simply not credible. Member states are not going to sign up to an arrangement whereby states in default could have their voting rights in the Council suspended, or be kicked out of the eurozone. It’s politically impossible – and Germany knows this.

So no EMF - but instead, protracted bargaining between Germany and France (which is playing it cautious), with the UK protesting from the sidelines, over what a revised set of institutional arrangements will look like. The IMF usually has maximal bargaining power at a country’s moment of crisis – it typically cares far less about whether the country makes it through than the country itself does, and hence can extract harsh conditions in return for aid.2 But – as we have seen with the Greek crisis – EU member states are far less able to simulate indifference when one of their own is in real trouble, both because member states are clubby, involved in iterated bargains etc, and because any real crisis is likely to be highly contagious (especially within the eurozone). In other words, the bargaining power of other EU member states (and of any purported EMF) is quite limited. If Greece really starts going down the tubes, Germany faces the unpalatable choice of either helping out or abandoning the system that it, more than any other member state, created. In short – any EMF, unlike the IMF, needs (a) to concentrate on preventing countries getting into trouble rather than dealing with them when they are already in trouble, and (b) deal with the fact that any country in trouble likely has significant clout in the architecture overseeing it.

From my sense of the EU integration process, and of the rough bargaining strengths of the actors involved, I imagine that any final bargain will emphasize forward-looking measures, which are intended to forestall problems before they arise. Unhappily for Bundesbank disciplinarians, these are likely to rely more on carrots than sticks – it is clear from previous experience with the Growth and Stability Pact that threats of harsh punishment are not sufficient to produce virtue if these threats are not credible. We can expect moderate levels of fiscal transfers (likely ratcheting up over time), aimed at helping ease the pain of adjustment, together with admonishments (and withdrawal of goodies) for those who fail to live up to their promises. It wouldn’t surprise me at all if these measures went hand-in-hand with some kind of revised Lisbon process aimed at bolstering domestic competitiveness etc. These measures will be accompanied by ex-ante vague and minatory arrangements intended for situations of real crisis – but in practice, the two will likely start to blur into each other. If you have mechanisms for real fiscal transfers (nb however that the fights over increasing the remarkably skimpy EU budget are likely to be bitter and protracted), then these will become one of the obvious policy tools that governments will resort to (by increasing fiscal flows temporarily) when crisis hits. So yes – the Greek crisis is plausibly a very significant step indeed in EU integration (whether for good or bad, I am not going to speculate, since even if I am right, it would depend heavily on the detail).

1 For the sake of fairness I should note that Charlemagne has written a genuinely excellent piece on the domestic political economy of the Greek crisis in the interim.

2 The exception being where the collapse of a country’s economy would have genuine systemic consequences.



Billikin 03.10.10 at 8:48 pm

“Ms Merkel admitted that the European Union had lacked the tools to deal with the Greek debt crisis: “The sanctions we have were not good enough.”

Sounds like a job for Ilsa, She-Wolf of the SS.



sean matthews 03.10.10 at 8:54 pm

> For the sake of fairness I should note that Charlemagne has written a genuinely
> excellent piece on the domestic political economy of the Greek crisis in the interim.

Indeed, and a lot better than the content-free thing Mark Mazower published yesterday in the FT.


John Quiggin 03.10.10 at 10:28 pm

Does “the collapse of a country’s economy would have genuine systemic consequences” mean something different from “if the country concerned was the US”?


Pete 03.11.10 at 12:12 pm

The “genuinely excellent piece” really is exactly that. It’s prompted me to do a bit of reading on the events, and to wonder whether similar issues apply in Spain and Portugal (emerged from dictatorships), Italy (the other Operation Gladio country), and possibly Ireland too, although its civil war is a bit further in the past.


bert 03.11.10 at 5:08 pm

It was an eyecatching announcement. Your eye was duly caught.
But it’s not clear to me what’s changed. And if your post makes one thing clear, it’s that you’re not clear what’s changed either.
I hope you’ll feel this is a fair summary of the Farrell view. No EMF. Bitter and protracted fights over moderate and perhaps slowly ratcheting fiscal transfers. Maybe some sanctions for fiscal delinquency, along the lines of the Maastricht fines that have been on the books for almost twenty years but have never come close to being levied. Oh – and the Lisbon agenda, which, like the poor, is always with us. None of this sounds like preparation for a “very significant step indeed in EU integration”.
When eurosceptics said that the euro would never happen, they were reading the politics wrong. What’s your reading of things as they now stand? Clearly you’re right that the key voice is the German national government as expressed in the Council. And people got excited at the start of February when Merkel emerged from meetings with the French talking about economic government. But look at what Germany is asking for. Deflation. Pain. Toil, tears, sweat. See Paul Krugman, briefly. Martin Wolf, at greater length. It would take a sizable slug of fiscal transfer, of which there is currently zero prospect, to make that pill go down beyond the short term. Is there even consensus over whether the German approach is correct, at the level of diagnosis let alone prescription? Krugman and Wolf both have a view on that. The Irish and others are currently chastened and keen to be agreeable, so let’s assume for a moment some form of consensus can be found. What are the chances of formalising it in a new treaty?
Charlemagne may well be proved wrong. But the right time for a victory dance is when the ink is dry on fiscal union, not before. Until then, for my part, I’m keeping a bet on the ad hoc approach. If Greece can’t refinance, expect a strongly conditional loan to emerge in one the various possible forms that have been batted about recently.


IM 03.11.10 at 8:53 pm

The conventional wisdom in Germany or at least in the sueddeutsche, did read Merkel differently:

“We would have to change the treaty” is just a polite way to say no.

I think you have spend more time and did more thinking on this proposal than Merkel.

Merkel either just swatted this idea down or at least kicked the can down the road. She has other problems right now. Perhaps she will care more after a certain state election.


Anthony 03.11.10 at 10:10 pm

“So no [new European institution] – but instead, protracted bargaining between Germany and France (which is playing it cautious), with the UK protesting from the sidelines” sounds a lot like “no substantial effects for EU integration”.

Arguing a lot then throwing money at the problem in amounts which make people unhappy because it’s both too much and too little is exactly what the present level of EU integration calls for.


Phil 03.12.10 at 9:47 am

Pete – the story up to the mid-90s was that Italy had got the worst of both worlds: a massively corrupt and clientelised public sector, with continuing total political exclusion of the Left. What would have happened if the Left had ever achieved ‘alternation’ might well have looked a bit like the Greek model – but, for various reasons, alternation was never going to happen in Italy. (In retrospect I’m quite surprised it was permitted to happen in Greece.)

This was always a bit simplistic – the Italian Communist Party had a real and well-establisehd base in local government, and they were involved in more or less informal power-sharing at other levels (most notably state broadcasting – the Christian Democrats took the first TV channel, the Socialists took the second and the Communists were given the third). It’s emerged since then that they were also involved in informal systems of patronage and corruption.

Now, 17 years after the implosion of the old system, Italy has really got the worst of both worlds – a polarised political system dominated by an openly corrupt Right, with a shambolic Left opposition which can’t decide whether it wants to mount a principled challenge to the Right, engage with them in a spirit of national unity or just get their own fingers into whatever tills they can find. Not bankrupt yet, on the other hand.


Zamfir 03.12.10 at 1:25 pm

I never understood Italy. It’s apparently been corrupt and in shambles on all levels of society for generations, but it just keeps working fine and it never turns really poor either.


Oliver 03.12.10 at 2:19 pm

The idea of throwing Greece out of the Euro is very popular in Germany.


JoB 03.12.10 at 2:36 pm

10- wait until summer holidays, when the Germans will experience the joy again of paying in the German home currency in Korfoe ;-)


M.G. in Progress 03.12.10 at 2:48 pm

Definitely we do not need an EMF with mandates and objectives similar to IMF.
My proposal is different and start also with a financial transaction tax as a first step of fiscal transfer.


Erik 03.12.10 at 3:37 pm

Anthony: Ouch! I would upvote you.

From the article: “It is clear from previous experience with the Growth and Stability Pact that threats of harsh punishment are not sufficient to produce virtue if these threats are not credible.”

And that translates to the level immediately below, to the State’s attempts at raising cash from its citizens. If the penalties with which it threatens them for tax evasion are not credible, then the tax will not meet expectations. Greece’s austerity package included tax hikes. Many Greeks I’ve heard interviewed on Deutsche Welle seem to think that since everybody else is cheating on their taxes, it makes no sense being the one honest dummy paying for everybody else. But no, the situation is so precarious that eurozone leaders have to be seen giving them some credit. As the Euro heads of State were nodding and harrumphing “Good to see Greece showing it wants to get its act together,” Athenians were rioting in the streets. I just don’t see this ending swimmingly.

For the eurozone to manage its transnational currency for stability (if it’s possible at all), it should give itself real transnational means of tax enforcement for when member countries find themselves at the Greek impasse (too complacent for too long, can’t claw their way back).


hix 03.12.10 at 7:25 pm

Greece is to expensive these days, the Germans are in Turkey now. Time to get Turkey into the Euro.


Oliver 03.12.10 at 8:58 pm

This joy does not exist. You don’t carry the money you spend on vacation as cash with you. The relevant costs to a traveler are not the cost of exchanging money, but what it costs to withdraw money at a foreign ATM.
The Euro is generally of little advantage to the average citizen. It serves you well if you live very close to a border and it makes things easier for importers and exporters. Otherwise it is not a big deal.


hix 03.12.10 at 10:51 pm

Well, first, i do life rather close to two borders, second, most Europeans life rather close to at least one, and third atms create lots of hassle and costs as well. So the Euro is great in an obvious everyday way for most Europeans.

But maybe the elite vis common people Euro conspiracy theories are just wrong about the social groups. Maybe the Euro is really a conspiracy by middle class public servants with long holidays against the poor which admitly dont travel a lot abroad due to fiscal constraints these days, at least in Germany according to some recent survey.


Henry 03.12.10 at 11:26 pm

Bert – delayed reply. I didn’t do a victory dance – instead I said that Charlemagne’s prediction was looking “decidedly wobbly.” Which it is. His possible explanation – that the German government is just trying cheap rhetoric to cover over its unwillingness to help Greece is really not at all convincing given the serious political cost of this rhetoric. It opens up a debate which Germany has been specifically and deliberately refusing to engage in for the last twenty years, for fear of what would happen. And once Germany admits that there _should_ be some kind of economic government (albeit, in its preferred outcome, a nasty and punitive variety of economic government), it opens up the debate for what kind of government etc etc. I am quite willing to entertain the possibility that we will see more integration of an intrusive and unpleasant variety, along the lines of Germany’s preferences, although I don’t think this will happen for the reasons I outline. But I don’t see how some sort of economic government can be avoided. Nor does Germany. And that is what has changed.


bert 03.13.10 at 1:08 am

All that sounds fair enough. I merely point out that this conversation started with some excited predictions that the immediate crisis would galvanise a substantial step forward in the integration of fiscal policy at an EU or eurozone level, at which Charlemagne stroked his chin in doubtful manner.
If you’re telling me that this step forward amounts to the opening of a debate, I’m happy to nod along. This isn’t the first rubicon Germany has crossed in recent years, after all. The former Yugoslavia was the site of the first foreign deployment of the Bundeswehr since 1945. It was, naturally, the source of much debate. Currently, German troops are bringing blue-helmeted goodness to some scattered tribes of pygmy vegetarians in Northern Afghanistan. Happily, there seems little prospect in the immediate future of Panzer groups trundling eastward across the steppes. In similar fashion, the teutonisation of european fiscal policy is likely to proceed at a sedate pace, if at all. Where austerity programs exist, they’ll be administered individually by the governments of the member states in largely uncoordinated efforts to recover national competitiveness. Any speculative attack is likely to meet a collective response assembled on an ad hoc basis. Fullscale functional spillover into fiscal union will have to wait for future crises.
Of course, I’m making some falsifiable predictions here. New developments are happening daily. If I’m spared, I hope I’ll have the guts to turn up here and eat crow if I’m proved wrong. But, like I say, I’m betting I won’t be.


bert 03.13.10 at 9:52 am

Schäuble followed up his announcement with an FT op-ed.
Gideon Rachman’s response is worth reading.
Let me just add the obvious point that there’s a Charlemagne-on-Greece sympathetic context-setting article to be written about German attitudes too.


JoB 03.13.10 at 11:22 am

15- Might it not better have occurred to you that it was a joke? The only truthful thing in it was that all of this is about the German home currency.


Oliver 03.13.10 at 2:19 pm

I was unsure about the serious nature of that comment. But I think the point about the utility of a common currency had to be made. And I think that the Euro has been an elite project without broad popular support.


JoB 03.13.10 at 2:57 pm

You may think that & I may think the opposite, but the popular uprising has not in fact happened.


Oliver 03.13.10 at 3:07 pm

I said without popular support, not popular hatred. The question is what happens if people are asked to pay for it.


JoB 03.13.10 at 4:48 pm

Well, we’ll see. My bets are on the euro continueing, Greece remaining in it and Europe being forced to move against speculation and regaining part of its sovereignty from the markets (i.e. those present at Davos).


Henry 03.14.10 at 1:56 am

bert – I think my claims are falsifiable (dunno if you were intimating otherwise). They are that we are going to see protracted negotiation over the next couple of years, leading to a set of governing and supervisory institutions for eurozone countries, with some not-very-well-disguised fiscal transfer capacities attached (likely justified using Lisbon agenda type language), and, in reasonably short order functional spillovers galore (the latter probably taking another crisis/near-crisis or two to get properly going. And Charlemagne wasn’t just seeking to shoot down grandiose claims – he was making his own counterargument that “the direction of travel is away from federal integration,” which is what I am taking issue with here. Furthermore, the only explicitly named target of his piece, Paul Krugman, was in fact not one of those who argued that we were going to get fiscal union overnight – instead PK was making a broader (and imo correct) claim about the unsustainability over time of the system as it now exists.


Maynard Handley 03.14.10 at 7:05 am

I don’t want to drag every discussion back to America; I am however curious about whether the pro-tighter-integration European elite have considered what this has meant for America. There are large swathes of America right now that wish the South had won their damn war, gone off to form their crappy country, and had left the decent people in the rest of the US able to form a civilized nation without constantly refighting the Civil War in one form or another.

The point is that once you create a situation where “they” have a larger say on what “we” do than currently exists in Europe, it’s not clear that you can turn that back. As an outsider, it seems unclear to me what the advantages to Germany, France, and the other marginally sane countries of Europe are to allowing the lunatics a greater say in the running of the asylum — you may get fifteen years of reconstruction with the adults in charge, but eventually that will end, at which point what?

Against this less than ideal future, I fail to see the downside of telling people who bought Greek bonds to go fight in bankruptcy court with Greece. We hear talk of contagion, but these are not countries unfamiliar to the monied world — I find it hard to believe that the population of financiers unaware of the difference between a Greek bond and a German bond is very large.


JoB 03.14.10 at 9:58 am

Maynard, I guess some of us believe in the power of education. Some of us believe it is able to cure the North of neurosis and the South of psychosis; and come up with a kind of tolerably insane middle ground. We might be wrong, of course, but at least we aren’t sure that it inevitably will fail; a belief, by the way, that condemns the believer to not bothering to spend energy on predicting it will fail – or, in other words, to “turn to page 72!”.


bert 03.14.10 at 12:57 pm

Maynard @26: Sometimes comparisons are useful. Look at Chirac and Bush as a pair of squabbling twins, for example, and you get a clarifying perspective on that whole transatlantic unpleasantness. But comparisons are just as likely to lead you astray. The French talk about “faux amis”.

From this shore, America looks like a federal nation state. The civil war was about whether expansion and change meant division. What, for example, would be the approach to slavery in the new states of the midwest? The outcome was continued union, and the compromises that came with it.
In Europe by contrast the Treaty of Rome is about the same age as today’s bunch of leaders. It’s very recent stuff. It’s preceded by a couple of thousand years of enthusiastically bloody history. It’s partly in this sense that you need to understand Charlemagne’s focus on nation states: his scepticism about Luxembelgian federalism is a preexisting condition.

I sympathise with your problem. Today’s GOP can only be described as degenerate. But from over here they look like Americans too.


bert 03.14.10 at 12:58 pm

Henry @25:
Krugman was quoted (in habitual ‘ought’ rather than ‘is’ mode) as follows: Europe “needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.”
As far as labour market integration goes, Germany has been the single most important laggard. I’m not a supply side bore, but in this case the effects of regulation (including the transitional arrangements, but not limited to them) are pretty obvious: in 2000, just under 60% of EU-based workers from the new accession states were based in Germany; by 2007, that share had dropped to 30%. [link, pdf]
As far as fiscal integration goes, when they talk about economic government, what do the Germans mean? They mean Maastricht, with teeth. Don’t want to make budget cuts? You will be instructed to do so. And fined if you demur. And stripped of voting rights if you protest. Germany is emphatically not talking about large-scale transfers. Quite the opposite.
So, Krugman’s position is classic functional spillover. Germany’s? Well, there’s a lot going on there, but plenty of it can be explained as Weimar PTSD.
As to whether that will cut it as the basis for a grand new integrative infrastructure, we’ll see in due course. On that subject, I wasn’t having a dig. I’m just conscious of the fact that I may be wrong. I’ve been wrong before, more than once. Hard to believe, I know, such is my sweep and breadth. But somehow, unaccountably, the case. My comments about falsifiability were merely preemptive: in the event that I am proved wrong, I can turn around and say “I told you that might happen”.


Henry 03.14.10 at 4:01 pm

Bert – fair enough. I agree that Krugman’s argument is classic spillover (although I think his claim, unlike mine, is prescriptive rather than descriptive). I completely agree on the sheer lunacy of Schauble’s propositions – but he is a canny politician, and I don’t think he can be under any illusion as to whether other member states are going to accept them or not. So either he is completely blowing smoke (which seems implausible to me, given that even raising these ideas has led to politically damaging criticism from the Bundesbank/ECB German rep) or he is trying to start a process towards necessary but unpalatable changes by making maximalist demands which he knows are unreasonable. And for the reasons stated above, I think it is the latter rather than the former. But all this said, like you, I have been known to be wrong …


hix 03.15.10 at 1:33 am

“As far as labour market integration goes, Germany has been the single most important laggard.

in 2000, just under 60% of EU-based workers from the new accession states were based in Germany; by 2007, that share had dropped to 30%.”

What sophistery. 30% is still above the German population share despite horrible labour market conditions and low gdp growth. Those numbers only show that Germany took a bigger hit early on. Besides, Germany has much more temporary workers -self employed craftsman that take many jobs across the border, half year contracts, from the new member staates due to the border position.

To pretend any other country would have aceted different under German circumstances is pure hypocracy.


bert 03.15.10 at 10:46 am

Read the link I gave. IAB stands for Institut für Arbeitsmarkt- und Berufsforschung. They’re based in Nürnberg. Sample quote: “While other destinations such as Ireland and the UK have opened their labour markets, Germany largely maintained the restrictions on labour mobility for the new member states which had already been in place before enlargement.”
Since that was written, Germany has decided to keep the restrictions in place until at least 2011.

By the way, “a bigger hit”, hix?
That’s the mindset right there.


Oliver 03.15.10 at 5:55 pm

As the problem has arisen in countries long part of the EU enjoying full labor mobility with Germany, how do you wish to make the case that the German restrictions on the new members matter?


bert 03.15.10 at 9:20 pm

Yes, good point. We’re talking about the eurozone, not the EU.

My received opinion is that when it comes to Germany there are what you might call non-tariff barriers to labour mobility, arising in part from the long-established practice of striking compromises inside the social market system. But I gather things have changed a lot with the Hartz reforms, and I’ve not looked at that in any detail.
So let me ask a couple of questions instead.
Will the German government be following Krugman’s recommendation, and responding to the euro’s difficulties with the announcement of a new programme of eurozone-focused labour market liberalisation?
Should they choose to do so, how would the electorate respond?

But you’re absolutely right that when I mentioned the single biggest laggard I was talking about policy towards the new enlargement countries, which means it’s only indirectly (at most, and if then only marginally) a single currency issue.


hix 03.16.10 at 1:08 am

The same regulation has different consequences depending on geography and local unemployment rates. Again, to pretend the UK or Ireland would have acted different under similar circumstances is pure hypocracy. Far different circumstances, high unemployment and geographic proximity to low income countries leads to different immigration regulation preferences.

The current situation is more pay locals 900€ welfare while immigrants works for 1000€. Say the immigrant is a lot more qualified works 20% faster and produces slightly higher quality, its obviously still a net loss for the country that alows the immigration. Probably an overall loss for both sides, the poor country loses the healthy risk takers the ones that would be most likely to fight the local corruption.
People like Krugman think the best strategy is to turn Athen into a second Detroit. The Greek disagre. You can move the labour to the people or the labourers to the jobs. The second strategy produces huge negative externalities.

But yes, things might change, the future might be that less qualified or less healthy locals work for 700€ and pay 300€ health insurance per Kopfpauschale so that immigrants dont get desirable jobs anymore. At least if Westerwelle and Koch get their way.

But yeah impossilbe that formualtion “take a hit” , sure i mast be some Nazi, because no one would ever lose from immigration in libertarian parasdises.


bert 03.16.10 at 7:13 am

We’re discussing labour mobility because it was part of a Nobel winner’s prescription for a functioning currency. But I guess we have an answer to my second question.
Here’s two more:
Would Krugman be amused to be called a libertarian?
How about in a sentence containing the word ‘Nazi’?
Probably not. It’ll happen to him most days.


Oliver 03.16.10 at 7:30 am

The German labor market has been a big success story in this crisis. No government is changing that. There has been a change to universities making degrees comparable in Europe. That will have a small effect in the long run.

The government might reform the tax code or/and the health care system. But theses reforms will make unit labor costs lower, so make the problem worse.

The biggest obstacle to moving labor to Germany is that in Germany you need to speak German. Few learn German easily or fast.


hix 03.16.10 at 1:56 pm

Oettinger disagrees “English will become the work language”:

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