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.