08 September 2011

Paul N Goldschmidt: Merging EMU Members’ IMF quotas would provide the strong political signal markets are waiting for!

There is a broad consensus that the financial crisis should be addressed at the political level if Governments rather than markets wish to reassert their leadership in shaping the future of the global economy in general, and that of the eurozone in particular.

So far, successive gatherings of the G20, the European and eurozone councils or bilateral meetings, such as the recent Franco-German summit, have failed to impress markets. Politicians seem at a loss to understand why, despite their efforts and the unquestionable progress made since the Lehman debacle on both the legislative and regulatory fronts, markets remain extremely - as well as dangerously - volatile.

Blaming scapegoats such as rating agencies, unidentified “speculators”, or the indecent remuneration of bankers, is no substitute for decisive action. Authorities appear reactive rather than proactive, remaining consistently “behind the curve” and inducing a feeling of “too little, too late”. Markets are constantly tempted to test the strength of the political will underpinning these mainly verbal commitments.

The welcome statements by President Sarkozy and Chancellor Merkel vowing to do “whatever it takes” to ensure the future of the euro, the Commission proposals on strengthening the economic governance of the eurozone (European Semester and reinforcing the SGP), and the Franco-German initiatives announced last month lack the necessary credibility to deal effectively with the developing EMU sovereign debt crisis, either because they remain too vague or because the time frame for effective implementation is incompatible with the urgency of the situation.

Thus, incorporating the “golden rule” in 17 Constitutions is a long-term objective with little relevance to dealing with the immediate crisis. A commitment to a strict observance of the reinforced SGP would have achieved the same objective, with the advantage that a specific uniform sanctions regime gives it far more credibility.

Similarly, the recently-welcomed ruling by the German Constitutional Court increases impediments to deciding future intervention measures in a domain where speed of decision and implementation is of the essence. This is bound to create further market uncertainty as to the effectiveness of the proposed European Stability Mechanism.

One could list a number of additional well-intended measures, such as the “harmonising” of Franco-German fiscal and economic policies, or the creation of a “eurozone economic government”, which will do little to underpin an elusive “economic recovery” that is considered the key to deal with the debt crisis.

It is high time to recognise that there is no escape from paying the price for the current situation created by decades of excessive indebtedness. The unavoidable pain can, however, be mitigated if two principles remain at the centre of preoccupations.

The first is ethical: all measures must meet the test of being considered equitable. Though, unsurprisingly, the effects of austerity will be felt to a greater extent by the more vulnerable segments of the population, every effort should be made to ensure that the more fortunate are not exonerated from bearing their fair share of the effort.

The second is psychological: it calls for a restoration of trust in political leadership. Politicians must be prepared to take risks that may be unpopular and liable to put their own political future in jeopardy, as Helmut Kohl did when he imposed parity in converting a weak East German currency into the almighty western Deutsche Mark.

At present, further EMU convergence and harmonisation can only be achieved over time, as finance Minister Schaüble rightly argues when he opposes any immediate mutualisation of EMU sovereign debts. Nevertheless, one should implement forthwith emblematic measures that, by their irreversible character, are capable of convincing public opinion and financial markets that EMU is here to stay,

That is why, within the framework of the recent Franco-German agreement, Ministers Baroin and Schaüble should suggest reactivating the idea of unifying the quotas and the representation of EMU Members within the IMF, which was discarded for political reasons at the inception of EMU.

Such a move would provide clear advantages which include becoming the largest single shareholder of the IMF with a corresponding increase in the power and influence of the eurozone and the euro. This will prove particularly useful in the ongoing negotiations concerning the reform of the global financial system.

The expected counter-arguments deploring, among others, an apparent “loss of sovereignty”, are largely cosmetic (including the influence of some Member States as members of diverse IMF constituencies) and do not stand up against the efficiency gains and the lowering of costs. The representative of the eurozone on the IMF Board and his deputy should be appointed by the Eurogroup Council of Heads of State and Governments. Consideration should be given to naming such representative also as permanent President of the Eurogroup Council for a mandate of four years (rather than assigning this role to the President of the European Council); his deputy would be chosen among ECB managing directors to ensure appropriate coordination.

At the time of launching EMU, the political reticence for taking such a step was understandable (though regrettable), but the new circumstances created by the sovereign debt crisis offer a unique opportunity to reconsider the matter. Such a move, more than any number of declarations, would convince European and foreign public opinion of the unalterable commitment of France and Germany to EMU, and anchor firmly the expectations of the long-term soundness of the single currency. A unanimous endorsement of this initiative by the 15 other EMU Member States would create the appropriate conditions for restoring market confidence on which politicians can rebuild both their own credibility and the badly bruised trust in European Monetary Union.

Paul N Goldschmidt, Director, European Commission (ret); Member of the Thomas More Institute

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© Paul Goldschmidt