Schaeuble Says Euro Region May Need a European Monetary Fund
German Finance Minister Wolfgang Schaeuble said the Greek crisis shows the euro region should consider creating an organization with powers similar to the International Monetary Fund.
“For the internal stability of the euro zone, we need an institution that has the powers and know-how of the IMF,” he said in an interview with Welt am Sonntag published today. “We shouldn’t rule anything out, including the creation of a European Monetary Fund.”
The financial turmoil sparked by Greece’s budget shortfall has highlighted the absence of a single euro-region finance ministry that could tackle the default of a member state or force a country to cut its deficit before it got out of hand. Former Federal Reserve Chairman Paul Volcker said in an interview yesterday that the lack of political union to back up the European Central Bank is a “structural crack.”
Billionaire investor George Soros said Feb. 22 the common currency could disintegrate if the European Union doesn’t act.
“I support a stronger coordination of economic policy in the EU and the euro region,” said Schaeuble, who will publish his own proposals “soon.” He doesn’t support any IMF rescue package for Greece because that “would be an admission that the euro region can’t solve its own problems by itself.”
Euro ‘Football’
Schaeuble, who also said the euro shouldn’t become a “football” for speculators, said that any new organization wouldn’t compete with the IMF. His comments were confirmed by Finance Ministry spokesman Michael Offer.
The comments come after proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels. Countries could draw on funds equivalent to the money deposited at the EMF and exceed that amount if they agreed to a “tailor-made adjustment program” supervised by the European Commission and governments, they said.
The EMF could also ease the disruption caused by the default of a member state by offering investors new EMF bonds in exchange for the defaulted bonds, they said. Bond holders would be required to take a “haircut.”
“Setting up a European Monetary Fund is superior to the option of either calling in the IMF or muddling through on the basis of ad hoc interventions,” Mayer and Gros wrote in an article in the Economist.
The lack of a unified fiscal policy has sparked a divergence of bond yields across the euro region as Greece’s crisis worsened. The extra yield investors demand to hold Greek 10-year debt instead of German equivalents jumped to 396 basis points in January, the highest since 1998. The average gap over the past decade was 34 basis points. The Spanish and Portuguese spreads are about five times their respective 10-year averages.
Greece managed to sell 5 billion euros ($6.8 billion) in government bonds this past week after announcing a new round of austerity measures.
“I have no doubt that Greece will execute its announced measures,” Schaeuble said. “Their current efforts deserve big respect.”