Does the eurozone need its own monetary fund? (Hürriyet)

In Hurriyet Daily News (Turkey) and The National (Abu Dhabi)

HARRIS MYLONAS/JAMES RAYMOND VREELAND

Six months after the troubles with the Greek debt were unveiled by the newly elected Greek government, German Federal Minister of Finance Wolfgang Schäuble suggested that the countries of the eurozone should consider creating a European Monetary Fund, or EMF – in contrast to the International Monetary Fund.

Daniel Gros of the Center for European Policy Studies and Thomas Mayer of Deutsche Bank argued for an EMF a month ago in The Economist. Greek Prime Minister George Papandreou urged the EU to pursue this institutional change and the European Commission has taken up the challenge. European leaders reached a consensus last month following a drawn-out Franco-German compromise with provisions for bilateral loans by eurozone members (2/3 participation) and IMF involvement (1/3 participation) should Greece face any refinancing problems of their debt in the future. The Greek troubles might be coming to a close but the question remains: Does the Eurozone need its own monetary fund?

As we consider the usefulness of a regional monetary fund, it is useful to ask: Why did we ever need an IMF in the first place? It was summer, 1944, and the world was emerging from the Great Depression and World War II. Many believed that the economic turmoil of the previous decade had spurned beggar-thy-neighbor policies to maintain fixed exchange rates. To address trade deficits and debt, governments either had to tighten the belts of their own countries, or pass the buck on to others, through protectionism and competitive devaluations. In the late 19th century when monarchs ruled Europe, the austerity measures were politically palatable, but with the rise of democracy and the growing strength of labor unions, governments tended toward passing the buck. This beggar-thy-neighbor approach reached a crescendo in the 1930s when world markets collapsed.

An international monetary fund was proposed as a solution. Member governments would all contribute to a pool of resources from which deficit countries could borrow temporarily. The loan would allow the process of tightening the belt to be more gradual; the IMF loan would “soften the blow” of adjustment. Yet, the prospect of lending to deficit countries exacerbated a different horrible menace to global finance: moral hazard. The IMF loan might not just soften the blow of adjustment – it might forestall the need for adjustment at all, allowing deficits to widen until they were beyond the ability of even the IMF to bail out. The solution to this problem developed by the IMF was “conditionality:” in return for continued loan disbursements, governments had to follow policy conditions. If they failed to comply, the loan would be cut off. This solution directly impinged on national sovereignty, and the governments of Europe did not like it.

During the Bretton Woods era, from 1944 until 1971, many Western European governments borrowed from the IMF, but there were clashes over the degree of adjustment policies required by conditionality. On occasion, governments even went outside of the IMF, and simply devalued their currencies without IMF approval. Then, in the midst of growing social spending and the Vietnam War, deficits began mounting in the United States. The dollar was pegged to gold (the so-called gold standard). Yet, even the mighty dollar was not beyond speculation as deficits mounted. With an election on the horizon, President Richard Nixon was faced with the prospect of tightening the American belt, or forging a different path. In 1971, he suspended dollar convertibility to gold, and introduced a floating exchange rate. Within three years, every major industrialized country followed suit.

Under floating exchange rates, developed countries did not need the IMF. Trade deficits could take care of themselves as currencies gradually adjusted to changing circumstances. Prices of imports and exports fluctuated regularly, but wages and unemployment were safe from the day-to-day rigors of an open economy. This is at least the way it worked for most countries.

The United States was special, however, as the dollar was used throughout the world as the international reserve currency. No matter the size of deficits or the weight of debt, the dollar remained in demand, to the point that the current international monetary system is undergirded by an $800 billion US debt to China. This is not sustainable, and the externalities of imbalances can spill over to other countries around the globe. The meltdowns from Iceland to Greece are only the tip of the iceberg if serious adjustments are not forthcoming.

So bailouts of even the advanced economies of Europe are presently needed and may be needed again in the future. Is the eurozone ready to return to the IMF for help? They have gone back and forth on this issue. The European Union did not have any problem with Hungary or Latvia going to the IMF, but they have their own currencies. When mere rumors floated that Ireland might turn to the IMF, the euro tanked and officials from Ireland to Berlin were quick to quash the rumors. With Greece, the IMF seemed unthinkable at first, but then Greece and Germany started to dance. Germany hedged on bailing Greece out, and Greece suggested an IMF solution, perhaps as an act of brinkmanship: alarm Germany with the IMF-intrusion threat. This seemed to work, as Germany then seemed ready to come to the rescue. But then Germany softened on an IMF package. The outcome of the Franco-German compromise was somewhere in the middle.

Ultimately, however, this is a European problem. Economic integration has made the world a smaller place, but the most intimate connections are within regions. The crux of any bailout is the balance of how much liquidity versus how much adjustment. When we address this balance at a global level, through an institution like the IMF, there will be outside actors involved who are less impacted by the crisis and argue for more adjustment, less liquidity. Yet it is the countries within the same region who have the most at stake. A regional monetary fund is the solution.

The main difference between Greece and other states in the eurozone with high deficits is that the former is borrowing at higher interest rates. Beyond the recent plan, a more long-term intervention is appropriate, and it should be made at the regional level through a European Monetary Fund. First of all, an EMF will strengthen EU solidarity and will prevent speculators from profiting off of the troubles of the various members of the eurozone. Second, an EMF would preclude a more direct IMF intervention in the future which—at least symbolically—would undermine euro’s credibility and the EU project as a whole. Third, an EMF would further strengthen a “Political Europe.” Fourth, an EMF would prevent systemic risk in the union at large –if not a global one.

We believe that the countries of the eurozone should strive for a stronger and independent European Central Bank and the creation of a European Monetary Fund that would make a “European solution” to the troubles of Greece a reality.

* Harris Mylonas is assistant professor of Political Science and International Affairs at the Elliott School of International Affairs, George Washington University. James Raymond Vreeland is associate professor of International Relations in the Edmund A. Walsh School of Foreign Service, Georgetown University.

 

A Fist Full of Euros (The Utopian)

In The Utopian

Thomas Meaney,Harris Mylonas

Why did it take four months for Europe’s parent nations — Germany and France — to prop up the continent’s prodigal son, Greece? And what can the European Union do when it comes to coping with such behavior with its other children?

There is little doubt Greece needs to face up to the part it played in its current financial mess — in which its ballooning deficit threatened the stability of the nation and the euro. But it now appears that in the case of Germany, at least, the slow response was more than meets the eye. Chancellor Angela Merkel was not simply pandering to her fragile coalition and frustrated electorate. Instead, the Greek crisis turned into a three-part opportunity for Germany: The country has dramatically boosted its exports thanks to a weak euro, a German is now the front-runner to head the European Central Bank, and it can now more easily justify cracking the whip on the rest of the Eurozone.

As Europe’s biggest exporter, Germany has been hamstrung by a weak dollar and even weaker Chinese yuan. The devaluation of the euro relative to the dollar in the last three months by more than 10% has helped German exports recover from a devastating 19% drop in 2009. While Germany has traditionally been committed to a strong currency, Merkel has been content to let the export sector of the German economy benefit temporarily from the crisis. Call it the Greek stimulus. The old economic tanker is skillfully navigating its course.

Germany now also has a leg up in the race to replace Jean-Claude Trichet as the head of the European Central Bank. The candidacy of the longtime favorite, Italy’s Mario Draghi, has been severely compromised by his close ties with Goldman Sachs and its role in aiding the Greek government’s attempt to conceal the full extent of its debt. Now Axel Weber, the current Bundesbank president, leads in the running, putting the Germans in a much better position to have one of their own head Europe’s leading financial institution.

More important, Germany now stands on much firmer ground when it comes to haranguing debtor nations in the Eurozone to get their books in order. The austerity measures ratified by Athens in March are a necessary step on the road to Greek recovery and would have been impossible to implement without the impetus of the crisis. Now other financially shaky nations in the Eurozone — Ireland, Spain, Portugal and Italy — have incentives to take preemptive measures to avoid Greece’s predicament.

But Germany is not the sole beneficiary. There is also silver lining for the Eurozone as a whole in this crisis. EU nations such as Estonia, Latvia, Lithuania and Bulgaria, which have not made it into the inner sanctum of the Eurozone, will now face a much longer wait. That was not nearly as easy for Western Europe to justify before the crisis. Finally, the EU as a whole can extend the wait for controversial applicants for EU membership indefinitely. France and Germany can now point to the need for EU consolidation rather than cultural or religious differences.

So what’s the fallout? European leaders reached a consensus last month following a drawn-out Franco-German compromise. All sides portray the agreement as a victory. Greek Prime Minister George Papandreou will test the waters by borrowing 5 billion euros from the bond markets by the end of March. French President Nicolas Sarkozy has bargained for more EU bilateral loans and a restricted the role for the IMF, which is run by one of his political rivals, Dominique Strauss-Kahn. Meanwhile, Merkel has solidified her role as a European kingmaker and has called for treaty revisions that could include the creation of a European Monetary Fund and rules that would expel problem states from the Eurozone.

One thing remains clear. The parents of the Eurozone solved Greece’s problem without resorting to the direct — and embarrassing — involvement of the International Monetary Fund. In recent years, new EU member states such as Hungary and Latvia turned to the IMF when they needed assistance. But Greece is too close to home. Germany and France share the same currency with Greece and cannot risk jeopardizing the credibility of the euro in the long run. Trichet’s announcement that the European Central Bank policy-makers will extend emergency collateral rules beyond 2010 eases liquidity pressure on the Greek economy and makes it unlikely that Greece will need to ask for help from the Eurozone and IMF. Yet by paying lip service to the possibility of IMF involvement in the future, Merkel has calmed the fears of her electorate.

Despite the dragging of the German Chancellor’s heels, the solution to the debt crisis has been a European one. There will be more disagreements in the months to come, but the storm has, for now, subsided. What hasn’t shattered the Eurozone just might make it stronger.

Thomas Meaney is doctoral student in modern history at Columbia University and an editor of The Utopian. Harris Mylonas is an assistant professor of political science and international affairs at George Washington University.

 

Greece’s crisis, Germany’s gain (Los Angeles Times)

 

In the Los Angeles Times

 

By Thomas Meaney and Harris Mylonas

Why did it take four months for Europe’s parent nations — Germany and France — to prop up the continent’s prodigal son, Greece? And what can the European Union do when it comes to coping with such behavior with its other children?

There is little doubt Greece needs to face up to the part it played in its current financial mess — in which its ballooning deficit threatened the stability of the nation and the euro. But it now appears that in the case of Germany, at least, the slow response was more than meets the eye. Chancellor Angela Merkel was not simply pandering to her fragile coalition and frustrated electorate. Instead, the Greek crisis turned into a three-part opportunity for Germany: The country has dramatically boosted its exports thanks to a weak euro, a German is now the front-runner to head the European Central Bank, and it can now justify cracking the whip on the rest of the Eurozone — the group of nations that use the euro.

As Europe’s biggest exporter, Germany has been hamstrung by a weak dollar and even weaker Chinese yuan. The devaluation of the euro relative to the dollar in the last three months by more than 10% has helped German exports recover from a devastating 19% drop in 2009. While Germany has traditionally been committed to a strong currency, Merkel has been content to let the export sector of the German economy benefit temporarily from the crisis. Call it the Greek stimulus. The old economic tanker is skillfully navigating its course.

Germany now also has a leg up in the race to replace Jean-Claude Trichet as the head of the European Central Bank. The candidacy of the longtime favorite, Italy’s Mario Draghi, has been severely compromised by his close ties with Goldman Sachs and its role in helping the Greek government’s attempt to conceal the full extent of its debt. Now Axel Weber, the current Bundesbank president, leads in the running, putting the Germans in a much better position to have one of their own head Europe’s leading financial institution.

More important, Germany now stands on much firmer ground when it comes to haranguing debtor nations in the Eurozone to get their books in order. The austerity measures ratified by Athens this month are a necessary step on the road to Greek recovery — and would have been impossible to implement without the impetus of the crisis. Now other financially shaky nations in the Eurozone — Ireland, Spain, Portugal and Italy — have incentives to take preemptive measures to avoid Greece’s predicament. Less export-dependent Eurozone nations will benefit from a stronger euro and the increased consumer purchasing power of foreign goods that comes with it.

Lastly, EU nations such as Estonia, Latvia, Lithuania and Denmark, which have not made it into the inner sanctum of the Eurozone, will now face a much longer wait. That was not nearly as easy for Western Europe to justify before the crisis. Meanwhile, for more controversial applicants such as Turkey, the wait can be extended indefinitely. France and Germany can now make their case much more persuasively on economic rather than cultural grounds.

So what is to be done? There is a growing consensus among European leaders that their financial crises require a European solution. Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and Merkel have all spoken of creating a European Monetary Fund as the preferred solution, and the EU executive commission has already taken up the proposal.

One thing remains clear. The parents of the Eurozone want to solve Greece’s problem without resorting to the direct — and embarrassing — involvement of the International Monetary Fund. In recent years, new EU member states such as Hungary and Latvia turned to the IMF when they needed assistance. But Greece is too close to home. Germany and Greece share the same currency and cannot risk its credibility in the long run.

What hasn’t yet shattered the EU just might make it stronger.

Thomas Meaney is a doctoral candidate in modern history at Columbia University. Harris Mylonas is an assistant professor of political science and international affairs at George Washington University.