Will a „European Monetary Fund” be capable of maintaining the stability of the eurozone?

Abstract

The debt crisis and the escalation of Greece’s fiscal problems in 2010 forced European leaders to set up new institutions to rescue ailing eurozone countries. The European Commission endorsed a German proposal for establishing an International Monetary Fund-style rescue fund, the European Monetary Fund (EMF). As a result the European Financial Stability Facility (EFSF) created in May 2010 is to be transformed into a permanent rescue fund, the European Stability Mechanism (ESM) from 2013 on. Although these steps seem to have been necessary to deal with sovereign debt, several questions emerge concerning efficacy, feasibility, and moral hazard. There is strong opposition to the permanent rescue fund mainly among economists of the Northern European countries who argue that certain (Greece and some Southern European) countries’ irresponsible spending and the profligacy of their governments have resulted in the government debt crisis. According to them these countries deserve strict punishment because their insolvency is due to their own mistakes, and financial assistance would be just adding fuel to the flames. This analysis lacks understanding or ignores the fact that the problem lies much deeper: in the fundamental problems of a monetary union. These problems and all their implications will hold until the European Monetary Union (EMU) has been transformed into a political union. The long-term stability of the eurozone, however, depends a lot on the attitude of the members, which would derive intrinsically from the nature of the union after transition. It is not the severity of the punishment that really matters. Keywords: debt crisis, European Monetary Fund, European Stability Mechanism, European Financial Stability Facility, moral hazard