Unhappy Europe is creating its own monetary Fund – IMF competitor

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Недовольная Европа создает собственный валютный фонд - конкурент МВФ

On 15 December in Brussels will host the next summit of the European Union, whose agenda is the question of the creation of a European monetary Fund (EMF).

In 1979 on the basis of the European economic community (EEC) emerged the European monetary system (EMU), the creation of which was intended to protect Europe from currency fluctuations due to the transition from the Bretton woods monetary system to the Jamaican. Then was established the European Fund for monetary cooperation (European Monetary Cooperation Fund), formed by contributions of member States and designed to stabilize the exchange rates of individual countries within the EU through the issuance of loans for alignment of balances of payments. In the late twentieth century, when Europe began to move to a single currency (the Euro), the Fund ceased to exist.

On a common monetary Fund in Europe remembered again after about ten years. At the end of the financial crisis of 2007-2009, Europe began slowly to crawl into another crisis – the debt, which threatened the collapse of the EU. In new conditions the Fund has not needed to stabilize exchange rates national currency units (they were abolished), and in order to prevent flagrant violations of financial norms, which were defined in the Maastricht Treaty of 1992 (budget deficit, public debt, inflation, interest rates). In 2010 the chief economist of Deutsche Bank Thomas Mayer offered a full-fledged European monetary Fund (EMF) by analogy with the IMF.

In 2010 specifically to deal with the European debt crisis created the European financial stability Fund (EFSF). It was also decided to establish the European financial stabilization mechanism (EMFS) funded by the European Commission (60 billion euros) to resolve the debt problems of Europe and stabilize the Euro. Finally, in 2011, was created the European stability mechanism, the ESM (European Stability Mechanism, ESM), which was intended to replace previously established funds. A while the ECM will coexist with the EFSF, but in 2013, the last ceased to exist. There are only ESM – Fund, providing assistance to Eurozone countries when they have difficulties with money to meet external debt obligations. The resource base of the ECM is formed by contributions from 19 member countries of the Eurozone. Contributions are largely conventional, they represent a commitment of countries to contribute money in case of urgent need. Paid part of the capital of the ESM as of March 2017 amounted to 80.4 billion euros.

Most of the resources of the ESM mobilized by placing bonds on the market. Offerings were many, the maturities of securities are different, but they are all “long” and “extra long” (up to 40 years). The first issue of securities was conducted in 2011. Then the demand for bonds supranational Fund exceeded the offer in 9 times. The biggest issue bonds was held in October 2012 in the amount of EUR 7 billion. In 2017 it is planned to issue long-term bonds for a total amount of 11.5 billion euros. Despite the very modest yield of securities of ECM, they are still in good demand, because the rating agencies give them the highest rating. The last paper editions in General have a zero interest rate.

As noted on the website of the ESM issued to date, loans in amount of RUB 273.3 bn. The average rate of the credits granted by 30 September 2017 was only about 1.06% per annum. In the period 2011-2015 the EFSF and its successor, the ESM granted loans with a total volume of 2.5 times exceeded the total amount of IMF loans during the same period. The main beneficiaries of the ECM are Greece, Ireland, Spain and Portugal.

This is particularly true for Greece. To save her programs have been developed with the participation of IMF, ECB and European Commission. Behind the guise of the European Commission actually operates the ECM. The first two programs have already been closed, now operates the third (for a total of 86 billion euros). Today in the framework of the third programme of ESM listed Greece is 42 billion euros. All through the EFSF and the ESM to Greece was listed under the three assistance programs 182 billion euros. As of 30 October 2017 the ECM was the holder of 52% of the total sovereign debt of Greece. You should also pay attention to the fact that the ECM had to buy a long paper Greek Treasury: the average maturity of the debt on Greek securities, according to the ECM, is 32.5 years.

The lending capacity of the mechanism to date is 500 billion euros and used it according to the ECM, only 25%. This statistic is designed to inspire optimism in participants of the ECM in the event of a crisis mechanism will be able to provide massive assistance to countries in need.

A number of parameters of ESM loans even more attractive than IMF loans. So, the deadline for repayment of IMF loans to 10 years (medium – 3 to 5 years), and credits ESM – 40 years (average 30 years). Interest rates on IMF loans in the range of 2 to 5%, while ECM is about 1%. More flexibly and promptly addressed the issue of expanding the resource base (in the ECM are used to issue debt securities; the IMF several years unsuccessfully the question of the capital increase by doubling the contributions of member countries). It is not enough to say that the ECM does not put such stringent conditions of loan recipients as the IMF. The only serious drawback of the ECM is a narrow country focus (to date only four countries named above), and the output of the ESM outside the Euro area is unacceptable.

The phrase “European monetary Fund” for several years sounded in articles and speeches. And 20 March 2017, the Finance Minister of the Netherlands, the head of the Eurogroup (Eurogroup – an informal forum of Finance Ministers of the Eurozone countries) Jeroen Deysselblum in an interview with the Frankfurter Allgemeine Zeitung called on the EU to create a European monetary Fund (EMF) on the model of the IMF. Such a Fund, in the opinion of the People, can grow from the European stability mechanism. The European Commissioner for economic and financial Affairs Pierre Moscovici on the same day expressed support for the idea of a European equivalent of the IMF. Throughout 2017, this offer carefully prepared for the annual final EU summit. This raises a few questions.

Why Europe, your monetary Fund, if the IMF? The fact that the international monetary Fund is experiencing a serious crisis. USA as the main shareholder of the IMF do everything possible to prevent its reform. Dissatisfaction with the Fund growing from both the recipient country of loans of the IMF and the many States that are members of the organization and rightly believe that their share of votes in decision-making is greatly reduced. Some experts do not rule out the possibility of the collapse of this financial institution. There are also contradictions between the IMF and the European Union that emerged in the implementation of programs of aid to Greece. I note that almost all the money under the program of aid to Greece allocates to Europe (via ESM) and the IMF is involved in this, only their tips, which irritates Brussels.

One of the most difficult is the question of what EMF will differ from the current ECM. Experts put forward the following opinions: 1) expand the circle of participants (ECM covers the Eurozone, and the EMF will cover the entire EU); 2) expand the resource base; 3) improve the timeliness of the decisions (EMF will be spared from having stringy consultations, koi today, Brussels has to carry out with the IMF in the provision of aid to Greece); 4) expand the range of tasks (ECM allocates money for closing the budget deficits and the decision of problems of external debt; the EVF can become a hybrid, combining the models of the IMF and the world Bank, i.e. money can be allocated for the financing of investment projects which are of European importance).

I will not multiply the list of versions of that which can transform the current European stability mechanism. At the end of next week, I hope to find answers from documents of the EU summit. One can only assume that the process of the creation of the EVF will not be easy. Too wide may be the range of opinions among Eurozone countries and the EU on what should be the status of the Foundation and its resource base, functions, etc. while Keeps complete silence about the project’s EMF, the European Central Bank, whose activities today strongly intersects with the ECM, and tomorrow could further interfere with the EVF. The European Commission, which would be the main engine of the project, in its concise releases said that a final decision on EMF will be adopted by the European Council and the European Parliament only in mid-2019.

In conclusion, the creation of a European monetary Fund fits into the global trend of establishment of such institutions in other parts of the world. This trend is due to the IMF crisis, the impending second wave of the global financial crisis and the growing threats of disintegration of the world monetary system.

In 1976 was established by the Arab monetary Fund (AMF), in 1978 the Latin American reserve Fund (FLAR). Function and corporate governance in these funds are constructed by analogy with the IMF. Until recently, they were frozen, their influence even at a regional level was minimal. Today there are attempts of resuscitation.

During the currency crisis of 1997, which caused severe damage to more than ten countries of Southeast Asia, put forward by Japan was born the idea of creating an Asian monetary Fund. It was not implemented. It again revived during the global financial crisis of 2007-2009, but then she remained on paper. Today, when the world is on the verge of the second wave of the global financial crisis, Japan and some ASEAN countries made a third attempt to establish the Asian monetary Fund.

In 2009 at the initiative of Venezuelan President Hugo Chavez in the framework of MercoSur countries have created the Bank of the South (BancoSur), which combines the functions of monetary Fund and development Bank.

In the midst of the recent financial crisis Russia and its neighbors was created anti-Crisis Fund of the Eurasian economic community in 2015 was renamed the Eurasian Fund for stabilization and development (EFSD).

In addition, now there is a new kind of currency funds, which are quite similar to the IMF. It’s an agreement between Central banks and other national institutions on currency swaps (exchange currencies in the form of short-term loans) and other forms of assistance to stabilize national currencies, but that’s a topic for another conversation.

Author: Valentin Katasonov

 

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