The Strategist

A piggybank for the EU: IMF proposes creating a reserve fund for the euro zone

03/27/2018 - 11:58

The International Monetary Fund (IMF) opened an official expert discussion on the need to create "central fiscal stabilization mechanism" in the euro area, simply put, a rainy-day fund. The IMF believes that it is necessary to deduct 0.35% of the GDP of the euro area countries per year. This step could be an alternative to the idea of the euro zone budget, formed from the taxes of EU countries in the European Monetary Union. The new idea is already being discussed at the national level.

Alexas_Fotos via pixabay
Alexas_Fotos via pixabay
The report "A Central Fiscal Stabilization Capacity for the Euro Area" was recently released in a series of the IMF working papers. Leading economists of the fund offer their own version of the new stabilization fund. Judging by the role that the IMF played in resolving the "Greek crisis" in the euro zone in 2011-2013, this opinion will be quite influential and will become the basis for the fund's recommendations to its members in the euro area.

The idea of the report is the creation of a special fund (CFC), filled from the budgets of the countries of the euro zone and spent by its members in the framework of countercyclical economic policy. In fact, the IMF does not deny that this proposal is an alternative to the idea of the euro area budget or the EU budget, promoted since the fall of 2017 by French President Emmanuel Macron. It is supposed that it should be replenished from the unified VAT fees of the national jurisdictions of the euro area countries. Discussions on the fund’s creation have already been going on for several months. Thus, the ruling coalition of parties in Germany since February 2018 supports the idea of an "EU budget", the Italian Ministry of Finance - the idea of a network of national stabilization funds in the euro area, and there is a proposal for a "safety and reinsurance" fund in the euro zone under the control of the ECB.

The principles proposed by the IMF are that the creation of the CFC makes sense when the euro zone adopts the banking union legislation (that is, on merging the part of banking and insurance regulatory functions that remain after the creation of the ECB as an issuing bank in central banks of the euro area). There is also a broader idea - the CMU, a unified legislative and regulatory framework for investment and capital markets. The IMF offers to make deductions to the CFC itself according to the "budgetary rules": if indicators of a particular country deviate from equilibrium values to a "positive" side, the CFC receives "reserve" transfers from such a country into a single fund; if, however, they swing to negative values, the fund sets to cover the budget deficit. At the same time, the IMF believes that the monitored indicator should be not the GDP dynamics, but deviations of the unemployment rate from the medium-term trend: the authors show that alternative mechanisms are less effective.

At the same time, the IMF warns that the CFC should not be designed as a mechanism for permanent transfers from the budgets of the more prosperous countries of the euro zone to less prosperous ones. Its main task is to smooth out fluctuations in market conditions. In particularly difficult cases, the authors believe, the CFC should have the right to enter the global borrowing market. An alternative to CFC for the euro area, according to the IMF, can be either a full-fledged "euro area budget" (and special "euro area taxes"), or, in a narrower version, a unified European unemployment insurance fund (UIF).

Testing of mathematical models on materials from previous years showed that at the peak of the euro zone problems in 2013, the countries of the zone should have provided a transfer to the CFC about 1.1% of the euro area's GDP. The maximum accumulated payments from the CFC (the models suggest that it exists since 1990) would have been 20% of GDP for Greece in 2009-2016 and Spain in 2008-2015. The maximum budgetary burden would have been Ireland in 2007 (about 6% of GDP). Note that politically, the rainy-day fund may be even more attractive for the countries of the zone than the "European budget" with European taxes: according to the IMF the tax policy will remain the national competence of the countries.