Definition of European Monetary Fund

Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund (EMF), according to senior government officials.

Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece.

The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed by Wolfgang Schäuble, the German finance minister.

The fund would have resources to lend to eurozone member states in financial difficulty, but only subject to very strict conditions to curb excessive budget deficits and borrowing.

The idea was proposed by Germany and they are now trying to get France on board. [1]

Why has Germany suddenly proposed a European Monetary Fund?
The turmoil over Greece’s public finances has shown Europe’s monetary union, which today has 16 member states, ill equipped to manage crises. The debt problems of one of the eurozone’s smallest economies have threatened the stability of the entire region because it was unclear what might happen in a worst case scenario.

Behind the scenes, eurozone politicians have been considering the lessons. Establishing a European Monetary Fund could reduce uncertainty – bail-out procedures would have been agreed in advance – thus preventing crises from spinning out of control.

How would such a fund work?
So far, the German finance ministry has provided few details. But ideas were provided in a paper published in February 2010 by Daniel Gros, director of the Brussels-based Centre for European Policy Studies, and Thomas Mayer, chief economist at Deutsche Bank.

They proposed funding the EMF out of levies on countries that breached European Union fiscal rules (thus increasing the incentive to comply), supplemented by borrowing in the markets. If such a fund had been launched with the euro in 1999, the two authors calculated, it would have accumulated €120bn ($163bn, £108bn) by now – enough to rescue a small-to-medium-sized eurozone member.

In a crisis, a country could call on funds up to the amount it had paid in, providing its fiscal policies were approved by other eurozone members. Help beyond that amount would entail a supervised “adjustment programme”. [2]

European Monetary Fund Q&A