As Europe struggles with a debt crisis, the idea of a European Monetary Fund is quickly taking hold. Such a body could be a lender of last resort and keep financially-troubled governments from unsettling the euro and global markets, the way the recent Greek debt crisis has. That’s the kind of thing the International Monetary Fund usually does – but for the European Union to turn to that Washington-based body would be humiliation.
The open and urgent question: do European leaders have the backbone?whatever the working title of their new fund – to enforce tough new rules meant to safeguard the euro? And will a bailout fund just encourage more trouble?
A key lesson from the ongoing worries over whether Greece can pay its debts has been the vague EU response to the escalating difficulties of one of its members – one of the main reasons why the markets responded so negatively to the growing crisis in Greece was that no one knew what, if anything, the EU would, or could, do. And the crisis exposed the euro’s deeper vulnerability: no way to keep governments from breaking rules against running up big debts and undermining the currency.
Sentiment toward the euro deteriorated so sharply that the very future of the single currency became a subject of open debate?and its exchange rate plunged from around $1.51 in December to a low of $1.3610 on Monday.
Now the Europeans, or at least, the 16 countries that use the euro, appear to have grasped the nettle?they have to get their house in order, find a way to tighten budgetary discipline, and figure out how to rescue countries in trouble. The creation of a European equivalent to the IMF could be a key pillar of a post-crisis eurozone and all the signs are that the idea is getting support across the eurozone. German Finance Minister Wolfgang Schaeuble broached the idea over the weekend and on Monday Chancellor Angela Merkel, leader of the eurozone’s biggest country, came out in favour, calling it a ?good and interesting idea.?
The current situation suggests that ?our instruments are not sufficient? to cope with such situations, Merkel told foreign journalists. She stressed that ?we want to be able to resolve our problems in the future without the IMF.?
?The questions of course must be asked: who pays in, how does one pay in, how independent is it from the (European) Commission, and so on?? Merkel said. She said such a fund would require changing the EU’s basic agreement, recently updated on December 1 with the entry into force of the Lisbon treaty streamlining decision-making.