The IMF has a big plan: A multi-billion rainy day fund is meant to strengthen the euro. According to the proposal, Germany alone is supposed to pay €10 billion per year, for a ten-year period. EURACTIV Germany’s media partner “WirtschaftsWoche” reports.
Of course, Christine Lagarde chose the place wisely. The IMF chief chose Berlin, Europe’s secret capital, to present her spectacular proposal. The Germans are allowed to feel flattered – but that will hardly matter as the proposal from Washington could cause plenty of trouble in Berlin.
In the discussion over the reform of the eurozone, the IMF has made an explosive proposal: It wants to create a rainy day fund for the eurozone. If in the future a financially weak eurozone country gets into an economic crisis, it should automatically receive billions of aid into its budget. “To prevent a painful repetition of the crisis, the eurozone needs a central fiscal capacity,” Lagarde said in Berlin.
Plans for such a fund are also discussed in Europe. So far, the proposal is not new at all. What is new, however, is the volume of the pot of money that the IMF intends to create: each country is expected to contribute 0.35% of its economic output per year.
For Germany that would be up to €10 billion. Within ten years, Germany would have to raise €100 billion for the pot. In addition, the new fiscal capacity in an emergency should also be allowed to absorb own debts on the financial market. All this is likely to be difficult to convey in Germany, but also in other euro member states.
That is clear to the IMF boss, of course. She wants under all circumstances to prevent the impression that the pot could lead to a European transfer union. The countries would have to take on “self-responsibility” in the future, she said in her speech in Berlin, where she intentionally spoke in German.
In addition, the pot is intended to provide clear mechanisms to prevent countries from resting in the hammock and allowing others to pay for them.
With its new rainy day pot, the IMF wants to prevent a repetition of the downward spiral we saw between 2010 and 2012, when Greece, Ireland, Portugal, Spain and Cyprus, one by one, were driven to the brink of bankruptcy.
In the future, such a serious crisis should not happen at all, IMF experts explained. The IMF, therefore, proposes to send money from the pot to countries with high unemployment. If the unemployment rate in one year rises more than one percent over the average of the last seven years, money will be directed to the respective country.
According to IMF model calculations, the depth and duration of recessions can be shortened by up to 50%.
In order for the pot not to become a hammock for highly indebted countries in good times, the IMF wants to link payments to the previous observance of debt rules, which should ideally be reformed at the same time too.
The rules have become far too complex, says the IMF. Above all, a state that has received aid should pay higher contributions to the new pot after the crisis has subsided. This should avoid the emergence of a transfer union and avoid disincentives for states to allow themselves to be fed by others.
The IMF economists are confident: with this, the pot would stabilise the eurozone and prevent countries from getting into payment difficulties again so quickly. And at the same time, no new transfer union would emerge.
Proposal has little chance of implementation
Nevertheless, the proposal is going to meet with great resistance, also because the contributions of the individual member states, which the IMF plans for, are enormous. Especially, as Europe is also still considering equipping the European Stability Mechanism (ESM) with additional funds to help states in financial difficulties.
Moreover, it is difficult to create such a pot: if it were to come into force today, it would be clear that Germany would have to pay for Europe’s South, where unemployment is still high.
On the other hand, the IMF believes that the current situation is just about right: “The currently good economic situation in all eurozone countries, combined with the political will to strengthen the monetary union, offers a particularly good opportunity to strengthen the eurozone,” the IMF economists say.
In addition, the recipient country would change over time. By 2007, for example, Germany would have received money from such a pot, while Italy would have been a net contributor.
The IMF sees its proposal as a contribution to the debate – and relies on the power of its economic arguments. A eurozone budget, which French President Emmanuel Macron is betting on, is considered to be hardly enforceable by the IMF: too many national and EU institutions have to constantly agree on the budget.
The IMF fund, on the other hand, could be decided upon with clear rules and would automatically come into play during severe recessions.
Nevertheless, the proposal is unlikely to have any chance of being implemented in the ongoing debate on eurozone reform. This year, the euro member states want to reform the monetary union.
The window of opportunity is favourable: within the next twelve months, no election will take place in any major EU member state. Macron is particularly trying to set the pace as he promised a reform of Europe during his election campaign.
But Macron’s proposals are controversial. While Macron has proposed an investment budget for the eurozone, the Germans want to expand the ESM rescue package. There is also a dispute over the completion of the banking union and common European deposit insurance. The South wants more money, the North fears to become the paymaster.
Whether the proposal will help in this difficult situation is questionable not only because of the large amount of money that would be needed. After all, Europeans have been quite unanimous in recent months: They want to solve crises on their own in the future – without the IMF’s help.