x Abu Dhabi, UAETuesday 23 January 2018

Euro monetary fund unlikely despite efforts

Germany, Europe's traditional paymaster, wants a pan-European fund to help struggling EU countries in future. But its propects for success look slim.

The Greece-bashing by the German media and politicians had been subsiding in recent weeks after the suggestion, tongue in cheek, that the debt-ridden nation should sell off its islands to raise cash. So it came as a surprise when Wolfgang Schauble, the German finance minister, took a fresh swipe on Monday by saying nations that fail to get their budgets under control should be evicted from the 16-nation euro zone.

"We need stricter rules, which includes in the most extreme emergency the possibility that a country that persistently fails to get its finances in order leaves the euro zone," Mr Schauble told Bild, Germany's best-selling tabloid. "Such a prospect alone would ensure a completely new level of discipline." Opinion polls show that after months of uncertainty about Greece's creditworthiness that has pushed the single currency down 10 per cent against the dollar since December, most Germans would like nothing better than to banish Greece from the monetary union.

Mr Schauble's threat of eviction was aimed partly at keeping up the pressure on Greece, which has promised radical cuts in public spending and tax increases to control a budget deficit that grew to 12.7 per cent of GDP - more than four times the EU's 3 per cent ceiling - last year. But it was mainly intended to counter criticism of his idea to create a European Monetary Fund (EMF) to tackle similar debt crises in future.

Many in the euro zone are worried that such a fund would merely provide a safety net for countries to go on living above their means and reward them for their sins by transferring wealth to them. Mr Schauble, backed by Angela Merkel, the German chancellor, has argued that Europe must solve its debt problems itself, rather than resorting to help from the Washington-based IMF. The role of an EMF, similar to that of the IMF, would be to provide financial assistance on condition that the countries receiving it enact tough fiscal reform. It would give Europe the mechanisms it urgently needed to shield its financial system, he says.

Some see it as a German ploy to seize control of fiscal policy in fellow euro zone countries and ensure the stability of the currency, something it holds sacred after the trauma of hyperinflation and economic upheaval of the 20th century. There is another reason why Berlin is pushing for an EMF. Such a pan-European fund would help take the heat off Germany, Europe's largest economy and the continent's traditional paymaster, in the management of future crises.

There is broad agreement in Europe that the existing treaties designed to protect the euro are not enough. The possibility of a debt default by a euro zone member was never envisaged when the membership rules were drawn up in the 1990s, and no contingency plan was devised for crises such as the current situation in Greece. The Greeks papered over their public finance issues to gain entry to the exclusive currency club in 2001, and went on to run up enormous debts with money borrowed at the low interest rates available to members of the euro zone.

Mr Schauble has been so determined to garner support for an EMF that he continued his campaign from his hospital bed over the past week, telephoning colleagues and giving interviews after undergoing routine surgery caused by his confinement to a wheelchair ever since an assailant shot him during a campaign rally in 1990. Despite his efforts, it is unclear whether an EMF will ever see the light of day. It has had a cool reception from the European Central Bank and other euro zone members who say the permanent prospect of an in-house bailout could be carte blanche for countries to run up debts.

"Schauble has to show that he doesn't want to soften the existing rules, so he added the threat of evicting countries. But it will never happen," says Christoph Weil, an economist at Commerzbank. "No country that might one day be in danger of being thrown out of the euro zone would agree to the European treaty change necessary for such evictions to become possible." The EU countries have only just painstakingly approved the Lisbon Treaty of reforms to streamline decision-making in the 27-nation bloc, and are in no mood to push through further amendments that an EMF would presumably require.

For the next few weeks, Greece seems to be off the hook. Its ?5 billion (Dh25.11bn), 10-year bond issue on March 4 was more than three times oversubscribed, albeit it a painfully high price of 6.4 per cent, more than twice the amount Germany pays for its bond issues. Euro zone finance ministers on Monday agreed to provide quick financial assistance to Greece should it need it, and economists seem confident that it will find buyers for fresh bond issues needed to refinance ?20bn in debt coming due in April and May.

But it remains to be seen if Greece can continue to refinance at such high interest rates. The premium it pays over benchmark German bonds is expected to remain at 300 basis points for some time. And fears persist that other euro zone members with high deficit ratios, such as Portugal, Spain, Italy and Ireland, might eventually get into difficulties refinancing. The deficit of the UK, an EU member but not part of the euro zone, is also causing concern.

The president of Germany's prestigious Ifo economic institute, Hans-Werner Sinn, says Greece would be better off leaving the euro, devaluing its currency and cancelling some of its debt. "The problems are far too big for the country to get out of by simply saving," Mr Sinn says. The lack of economic convergence between the euro zone's richer northern countries and poorer southern countries was always regarded as a design flaw of the single currency, and it has been exposed by the pressure on national budgets caused by the global economic crisis.

Christine Lagarde, the French minister of economy, suggested this week that Germany was partly to blame for that disparity because its large trade surplus was endangering the competitiveness of its neighbours. Ms Lagarde called on Germany to curb its surplus and boost imports by fuelling domestic demand. Germany, the world's second-biggest exporter behind China, was quick to reject the accusation, saying it could not help making products that the world wanted to buy.

Compared with other euro countries, Germany has emerged unscathed from the global recession, partly because its companies have kept wages down and carried out painful efficiency drives in recent years, and because the government has cut back welfare benefit entitlements. "It's true that the imbalances in the euro zone are extremely big but it's up to the deficit countries to reform," says Uwe Angenendt, the chief economist at BHF Bank in Frankfurt.

"Germany is an excellent example of how competitiveness can be strengthened through wage restraint. Just five years ago we were still being labelled as the 'sick man of Europe'. We did our homework." Europe's agreement on contingency aid for Greece is at best a stopgap solution. After weeks of crisis management, it remains hard to discern the outlines of any coherent strategy to address the fundamental problems of the creaking euro zone.

The lack of convergence after 11 years of monetary union does not bode well, and the EMF looks unlikely to win backing. Only one thing looks fairly certain: the euro will continue to depreciate, economists say. Not just because of debt fears, but because the US is set to raise interest rates sooner, and more sharply, than Europe. @Email:business@thenational.ae More on Greece, b8