Establishing a European Monetary Fund
Euro area: Focus to remain on effective crisis response
The German SAI considers the European Commission’s proposal to reshape the ESM not to be an adequate approach for making the euro area resistant to crises. To ensure a stable currency union the rescue fund will have to place full focus on its core function of crisis response.
The European Stability Mechanism (ESM) is to be reformed and further developed to become a European Monetary Fund (EMF). The European Commission has submitted a proposal for this purpose.
In the German SAI’s view, the Commission’s plan puts at risk the effectiveness of the rescue fund to provide an adequate response in case of financial and currency crises in the euro area. An EMF structured as the Commission sees fit would lose the role of the ESM that has been a genuine crisis response mechanism for the European economic and monetary union.
”A stable euro currency is of fundamental importance for Europe and Germany. Financial and currency crises in the euro area will have to be overcome in an effective way. For this reason, we need a rescue fund with a support mechanism that is clearly targeted and tailored to the purposes for which it has been created. The rescue fund shall not be overloaded with other functions or even create disincentives”, Kay Scheller, the President of the German SAI, said when he communicated the special purpose report to Federal Parliament. “What we now need is that Federal Parliament takes a more active role in the ESM reform discussion. Parliament should make a clear statement on what direction the ESM needs to take. Parliament should ensure that its participatory powers are not compromised. In the future, major decisions on how the taxpayers’ money is used should not be made without involving national parliaments” Mr. Scheller said.
The regulation proposed by the Commission aims at providing stability support to more Member States in a more timely and simplified manner. Stability support will no longer be contingent upon meeting reform requirements as has been the case so far. The EMF is to form part of a safety net for crisis-ridden euro area banks and to provide up to €60 billion euro for this purpose. Other remedies failing, banking bailouts will thus continue being funded by the taxpayers.
In addition, the EMF is supposed to expand its tasks, for example to mitigate cyclical fluctuations in the Member States.
The German SAI holds that such an expansion of the ESM’s role would result in disincentives for national governments and banking institutions and at the same time weaken the key crisis response function. The EMF’s funds would more heavily be relied on and the volume of defaults would increase.
To remain as effective as possible, crisis response needs to be closely targeted to its purpose and be clearly delimited from other instruments. This is a remedy of last resort and can in no way serve as a substitute for sustainable public sector finance policy. Following the example of other business branches, banking institutions should be held liable for the risks they incur in line with principles governing the market economy.
Against this background, the German SAI recommends to Federal Parliament taking an active role in reform discussions at an early stage. The Federal Parliament could then support the Federal Government in complex negotiations at EU level and provide advice on how to shape the EMF to become an effective mechanism.
Today, the German SAI has communicated the audit report on establishing the EMF to the two Houses of Parliament and to Federal Government.