The Making of European IMF: Germany Wants Strict Rules to Prevent Crises

Written by | Monday, November 26th, 2018
@Eubulletin

Germany wants to impose strict eligibility criteria on a “European Monetary Fund” that is in making now. The fund seeks to help Eurozone states that are in difficulty. Many Eurozone countries want the existing European Stability Mechanism (ESM) to be turned into a more robust structure to help prevent crises. Resources from the fund would be accessible to countries that had experienced an “asymmetric economic shock outside their political control”.

The proposals foresee a role of the fund in helping heavily indebted states out of crisis, a task currently being owned by the European Commission. The fund would, however, be stricter in and take the form of a more stringent “macro-economic adjustment program with ex-post conditionality”. Germany, the backbone of Europe’s economy, has traditionally been hawkish and the new proposals follow this tradition. Making the fund available to countries with unhealthy finances would risk creating “moral hazard”, Germany says, “where low-interest ESM loans are misused to postpone necessary budgetary adjustments and structural reforms”.

To qualify for no-strings assistance, the country would have to have a budget deficit of less than 3% of GDP and a public debt below 60% of economic output – or demonstrate in another way that it had decreased its public debt by 0.5 percentage point of GDP in each of the three previous years. Eurozone finance ministers are expected to agree by the end of the year on how they want to handle the stabilization funds. With its debt-to-GDP ratio of 131% in 2017, Italy remains a major concern because if the country experienced a serious debt crisis, it could easily endanger the entire region’s economic stability.

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