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An Evolutionary Path Towards a European Monetary Fund
Abstract
There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF activities, such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The financial resources of the ESM will be required as a backstop only intermittently, in times of great financial market instability. The need for this will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution of the ESM should thus aim at enhancing flexibility in its instruments while clarifying its overall mandate (financial stability), rather than changing the details of the rescue mechanism or its institutional structure. The financial stability function of the ESM should be extended to the central institutions of the Banking Union, with an ultimate backstop for the Single Resolution Fund (SRF). Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.
... First, a prominent role is undoubtedly played by the European Stability Mechanism (ESM) mutual aid program inaugurated in 2012. This program is a true intergovernmental financial institution with a permanent character and has been modelled on the characteristics of the International Monetary Fund (IMF) as a true rescue-fund (Minenna & Aversa, 2019;Gros, 2018) with the aim of ensuring the economic and monetary stability of the Eurozone. ...
As economic scholars and researchers are well aware the Covid-19 pandemic is severely affecting all the European Countries both from a health and economic-productive point of view, and it is not expected to be over before the spring of 2022. In order to counter the effects of this pandemic on the societies and economies of the 27 Member Countries of the EU, the European Institutions (in particular the ECB and the European Commission) have prepared an extensive series of financial assistance instruments, some of which have been developed from scratch while others that already exist have been adequately strengthened. The paper will preliminarily ascertain if Covid-19 was really a “perfect storm”, as such absolutely unpredictable, or if it was the consequence of unpreparedness and underestimation. Then the ordinary and extraordinary instruments of financial assistance which the European Institutions have made or will soon make available to the member Countries of the Eurozone to counteract the severe fall in GDP as well as the increase in the unemployment rate, will be investigated. Finally, some conclusions on the topic at stake will be drawn.
This article aims at giving a contribution to the issue of protecting bank accounts and deposits by national deposit guarantee schemes through financial assistance interventions of an optional and voluntary nature, instead of the reimbursement of only legally protected deposits in case of bankruptcy of the depository bank. Firstly, we investigate the EU framework for bank crisis resolutions. Specifically, we briefly analyze the EU rules on both prevention and resolution of banking crises pointing out the economic rationale behind the “bail-in” principle, and then identify the characteristics of the third “pillar” of the Banking Union, the EU Deposit Guarantee Schemes. Subsequently, we examine the operating procedures of the Italian Guarantee Scheme (FITD) focusing on the non-required by law interventions carried out by the latter to protect bank accounts and deposits and at the same time prevent or resolve the crises of Italian banks. Finally, some conclusions on the topic at stake will be drawn.
CEPS Research Reports provide in-depth analyses of a wide range of key policy questions facing Europe, drawing on state-of-the-art research methodologies and the latest literature. As an institution, CEPS takes no position on questions of European policy. Unless otherwise indicated, the views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated. 978-94-6138-593-2 Available for free downloading from the CEPS website (www.ceps.eu) Abstract Following the financial crisis, the EU put in place a number of instruments aimed at providing macro-financial support to EU member states in difficulty, five of which remain in place. At the request of the European Parliament, CEPS carried out an in-depth assessment of the functioning and institutional arrangements of these support programmes with a view to providing a solid basis on which to design a sound architecture that can serve Europe for decades to come. This paper draws a number of important lessons from this assessment and identifies a few crucial issues that still need to be addressed.
The quality of financial integration is one of Europe’s principal concerns in the aftermath of the great crisis. The lack of risk sharing lies at the heart of the financial instability produced by the rapid retrenchment of capital flows within national boundaries. The limited cross-border banking and capital markets activity is unable to provide investors with the necessary risk diversification to allow economies to withstand asymmetric shocks.
This book builds on a year-long discussion with a group of academics, policy-makers and industry experts to provide a long-term contribution to the Capital Markets Union project, launched by the European Commission in 2015. It identifies 36 cross-border barriers to capital markets integration and provides an organic plan, consisting of 33 policy recommendations, to relaunch EU financial integration. These aim to improve the key components of cross-border capital market transactions: price discovery, execution and enforcement. It also provides a comprehensive overview of the current structure and the state of integration of Europe’s capital markets.
When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries' sovereigns into default. In this sense, member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple balances arise. This text analyzes the implications of this fragility for the governance of the Eurozone, and concludes that the new governance structure (ESM) does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, member-countries may lose the capacity to use automatic stabilizers during a recession. This is surely a step backward. The text suggests a different approach to manage these problems.
Commissioned by the European Parliament, this study outlines concrete options for improving the external representation of the euro area in international institutions such as the IMF, the World Bank and the G-20. The study proposes a two-stage process, the first of which requires the creation of a permanent subcommittee of the Eurogroup Working Group (EWG) to elaborate common positions at international level. A second step, taken in the longer term, would consist of creating a single-member position in the IMF and World Bank by merging national quotas via the European Stability Mechanism (ESM). For the G-20, a single membership of the euro area could create inconsistencies with the European Union membership. However, a euro area membership could be envisaged if a more economically and financially integrated euro area were to develop.
According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)
This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in Europe and particularly in the euro area. The institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. It therefore follows that cross-border banks would be useful to deal with regional shocks. But large banks pose the ‘too big to fail’ problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area. The extent to which the (incomplete) banking union now put in place for the euro area provides some shock absorption is also discussed.
When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate, and available sanctions sufficiently tough.
A mechanism to restructure the debt of an insolvent euro country is a missing element in the emerging institutional architecture of the euro area. The introduction of an insolvency procedure for sovereigns faces a dilemma: in the foreseeable future, its introduction would risk pushing Europe back into acute crisis; but the indefinite postponement of reform would impair the credibility of a future regime change. Against this background, this article reviews arguments and existing blueprints for sovereign insolvency procedures in the euro area and develops a Viable Insolvency Procedure for Sovereigns. This procedure avoids any sudden measures which could destabilize the present fragile situation but carefully designs an irreversible transition toward the new regime. The proposal comprises two pillars: an insolvency procedure for the long run and a credible bridge toward that system.
Europe’s policy-makers are engaged in protracted discussion on whether and how to increase the size of the euro rescue funds (the EFSF and the ESM). In this Policy Brief, Daniel Gros and Thomas Mayer argue that this attention on the headline size of the EMS and EFSF is misplaced. They propose that a simpler solution would be to register the ESM as a bank, with access to the ECB under the same conditions as apply to any normal bank. This would provide a liquidity backstop for the EMS which could refinance any secondary market interventions at the ECB. The size of the guarantees given to the ESM would then become secondary.
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