Greece‬, ‪Eurozone‬, ‪Bailout‬, ‪Finance‬, ‪Eurogroup‬, ‪Mário Centeno‬, ‪International Monetary Fund‬‬ - News broadcast about finance business real estate loan insurance and forex trading crypto markets

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Thursday, April 19, 2018

Greece‬, ‪Eurozone‬, ‪Bailout‬, ‪Finance‬, ‪Eurogroup‬, ‪Mário Centeno‬, ‪International Monetary Fund‬‬

 European Stability 

If it is up to Eurogroup chairman Dijsselbloem, the European Stability Mechanism (ESM) will ultimately be converted into a European Monetary Fund. This new organization must, following the example of the International Monetary Fund, help the European countries in trouble. In addition to providing emergency loans, this supra-national authority must also become involved in the implementation of reforms in the problem countries.

Behind the Brussels screens, work is being done to establish a European Monetary Fund, as an alternative to the IMF. With such a fund, the economy of the euro zone will be further integrated. Jeroen Dijsselbloem supports that.
But what else do we have of a politicized European institute?

Those who follow the European financial news a little more recently, the term 'European Monetary Fund' EMF in Europe which has become increasingly common. From different European capitals there has been a long-standing call for such a fund. Brussels would now work on its creation, using the existing ESM permanent emergency fund, the European Stability Mechanism, as the basis for such an EMF.

But why would Brussels want to establish at all?

Does it already use the expertise of the IMF, the International Monetary Fund? What does a European variant actually add?
Back in time: from no-bail-out to the ESM

To understand why Brussels wants this, we first have to go back a bit in time. To 2010 to be precise, the beginning of the euro crisis. It turned out that various eurozone countries - with Greece as the most well-known example - could no longer pay back their debts. In the end, these countries were saved by the other member states.


The 'program countries' had to implemen

According to the Maastricht Treaty, however, Member States are not allowed to finance debts or deficits of other Member States - the known 'no bailout' provision. To make this possible, an exception clause from the Treaty of Lisbon had to be invoked  Thus the clause was put aside and the problem countries were rescued from bankruptcy. First with bilateral loans, then with temporary emergency funds; because they always proved to be inadequate, a permanent emergency fund was eventually set up - the aforementioned ESM.

However, the funds were not simply provided: all kinds of conditions were imposed. For example, the so-called 'program countries' (ie the member states of the euro zone that use the emergency funds) had to make severe cuts in their state spending and implement radical reforms in their economies.

To ensure that these cuts and reforms were actually implemented, a control device was set up from Brussels. This was given the poetic name 'troika', referring to the three institutions that make up this auditor: the European Commission, the European Central Bank and the IMF.

The impossible position of the IMF
The participation of the IMF was even a necessary condition for the Netherlands and Germany, a so-called conditio sine qua non. After all, both countries reasoned: with the IMF on board an impartial institute would be brought in, one that also had a lot of experience with helping countries struggling with their debts.

What appeared during the rescue of Greece?

It was different. Firstly, the IMF had to accept that it could not apply an essential part of its tried and tested approach to euro countries: the devaluation of its own currency. It was precisely through participation in that euro that the exchange rate of the national currencies could no longer be adjusted (downwards) if it had become too expensive.

And there was another problem the members of the troika were misunderstood about canceling unsustainable government debts - even though such a part of the IMF method.

Because what turned out during the rescue of Greece? The euro was far too expensive for Greece compared to the relevant foreign countries - in this case the stronger countries of the euro zone. Because the Greeks could no longer devalue their drachma - the currency no longer existed - the recovery of the Greek economy was severely hampered. This circumstance was new to the IMF.

After extensive analyzes of the Greek economic situation, the IMF concluded that a substantial cancellation of Greek debt was necessary to allow the economy to recover sustainably. In the opinion of the IMF, this waiver was even urgently necessary the Greeks would never be able to repay the loans that they had received through the emergency funds. Before that, the Greek economy was much too small in relation to the greatly increased government debt. Moreover partly because of the excessively expensive euro it was too weak and too cumbersome to absorb new economic shocks.

But that demand was against the sore leg of the other two members of the troika: the European Central Bank (ECB) and the European Commission (EC) dominated by Germany and France. When canceling the Greek debt, German and French banks in particular would have had to make large losses.

Subsequently, the difference of opinion within the troika escalated which is not only inside rooms, but also beyond. The IMF argued that political games were being played by the EC and by the ECB, suggesting that the EC and the ECB were merely aiming to save the euro and maintain the euro zone. The Commission and the ECB, in turn, felt that the IMF was 'too difficult' and had to be removed from the Troika.

That is why there is currently a call in Brussels, Paris and Berlin for replacing the IMF with a European IMF, or a European Monetary Fund. Then any future problems 'at European level' (read: taking into account German and French political sensitivities and partial interests) can be resolved.

With the permanent emergency fund ESM, Brussels has an institute with which unlimited funds can be made available to save weak euro countries and banks. In other words, that ESM is an ideal institution to serve as a prelude to the EMF. This also means that the ECB no longer acts as a safety net for problem cases, but the wallet of European citizens. The ESM is filled with money from the taxpayer from the eurozone countries.

    It is not yet known who will succeed?

In the eyes of proponents, an EMF fits seamlessly into the plans for a further deepening of the euro zone, since the fund will intensively engage in 'problem cases' in order to promote the stability of the euro zone. That does not have to be exclusively in troubled Member States: they can also be European system banks. These are now being monitored by the ECB.

Proponents of such an EMF, such as Euro Group Chairman Jeroen Dijsselbloem, are of the opinion that with the establishment of a European Monetary Fund both the ECB and the EC are unlocked, with the result that these institutions can focus on their core tasks. He also thinks that the ESM should 'develop the technical expertise that now only the IMF has.' Dijsselbloem had already indicated earlier this year that the ESM should be converted to a European IMF. We now also seem to know why: he becomes a part-time strategic advisor to the same ESM.

In January next year, Dijsselbloem will resign as chairman of the eurogroup. It is not yet known who will succeed him. It is also not yet known how the precise division of roles between a new (permanent) chairman of the Eurogroup and the intended chairman of the EMF will be. According to the planning of the Council of Heads of Government, the knots are being cut through about May or June 2018.

But Dijsselbloem is not the only one to argue for the establishment of an EMF: Commission President Jean-Claude Juncker is also in favor. This in the context of his plans for a deepening of the euro zone and thus for a European political union plans that can also count on the warm support of the new French president Macron.

The most important player on the European stage, Germany, has so far been fairly up-to-date. The former Finance Minister Wolfgang Schäuble was 'in principle' positive about the transformation of the ESM into an EMF, but the political landscape in Germany has changed considerably since the last elections. Not only has the Euro-critical party AfD been the third largest party in the Bundestag; the recently re-elected Chancellor Merkel is also in the middle of a formation process with, among others, the liberal FDP. This coalition fellow, through the eloquent party chairman Christian Lindner, has already strongly criticized the proposals of Macron and Juncker.
European political interests

Opponents of the EMF, such as professor Lex Hoogduin, argue that there is no reason at all to come up with a new European institute - especially since it is very questionable whether an EMF has the necessary expertise that the IMF does. .

Moreover, they argue, with the elimination of the IMF that the only non-politicized player at the negotiating table disappears. They fear that this will not lead to a rational policy, but that instead political interests will prevail.

In short, the establishment of such an institute as the EMF is a controversial subject that leads to much discussion behind the scenes. Dutch diplomats and lobbyists in Brussels warn the Dutch government not to be naïve about the power politics games that are being played in Brussels: 'We are constantly being teased because The Hague wants to play everything according to the rules.

"We think there is a lot to be said for further developing the bailout fund of the euro zone into a European IMF in the medium to long term," Dijsselbloem said in an interview with the Frankfurter Allgemeine Zeitung on Monday. The President of the Eurogroup notes that the ECB is less and less comfortable with the Troika, while the European Commission should focus on other important tasks. Therefore, according to Dijsselbloem, it is desirable to transfer the Troika's task to a European Monetary Fund in due course."

European Monetary Fund

According to Dijsselbloem, the existing ESM emergency fund must develop the technical expertise that currently only the IMF has access to. As a result, Europe could eventually become independent from the IMF in dealing with a crisis such as that of Greece. It is not the first time that the plan of a European Monetary Fund is being proposed. Earlier, the German minister Wolfgang Schauble also expressed his wish for a European counterpart of the IMF.

Greece and its international creditors are still divided on the conditions under which a new emergency loan must be provided. As a result, it is still uncertain whether Greece will receive another tranche from the emergency fund later this year. The ESM has already provided € 265 billion in emergency loans since it was set up.

The ESM is the permanent successor to the temporary EFSF (European Financial Stability Facility) that was rigged during the European debt crisis to provide emergency loans to the southern 'problem countries'. Several PIIGS countries then threatened to lose access to the international capital market, because there were major concerns about a possible technical bankruptcy of some euro countries.

Top public comment

1) The European Monetary Fund seems to be a tandem of the ECB. While the ECB is rolling its printing press back to € .60 billion per month from 1 April 2017, the € urocrats want to use a money-saving machine. This apparently compensates the € 20 billion through a trick and eliminates the difficult but correct IMF. Inflation is now 2.2% in Germany, Draghi is not shrinking and apparently wants to boost inflation in a cunning way, so that south E.U. can pay off his debts with fairly worthless money. In addition, the pension funds and small savers are silently sucked empty. Not only because of negative interest rates but also because of inflationary money. For the small tradesman without a pension, but with a wealth from the sale of his business, the grapes are completely sour because there is still a hefty blow Power returns on top.

2) You can get various observations from this. It seems to me a good initiative to make Europe less dependent on the United States. In monetary, economic, political and military terms. Exactly how that is to be shaped, you can discuss this endlessly.

Is Europe better off with the ECB and the euro?

Should the currency union be smaller (how many countries and what then ..)? Or should we all have kept our own currency?

I am still inclined to give 'the European project' the benefit of the doubt. The creation of a European Monetary Fund seems to be an inevitable next step, but it is of course also symptom-fighting. The problems we have in the southern euro countries are of course inextricably linked to the idea that debt paper is always safe and that, as an investor, you could just as easily lend your money to Germany as to Greece. That is simply not true in a currency union in which the money press and the devaluation tool have been put out of action.

My position is that bond holders must be willing to take a loss on their government bonds. Just like a state like Detroit or California can defaults, Greece and Spain must also be able to defaulate. The euro just keeps going, just like the dollar. The decoupling of money and state!

Nevertheless, the Dutch government seems to have pre-sorted on the eventual establishment of an EMF. In the letter to Parliament that the Minister of Finance Dijsselbloem sent on this subject to Parliament on 11 September last, he argues, inter alia, for the establishment of an SDRM (Sovereign Debt Restructuring Mechanism). According to this mechanism, unsustainable sovereign debt, under the direction of the EMF, should be able to be written off - if and insofar as these are untenable for the (euro) country in question.
No IMF exit but troika exit

But letting the debit of unsustainable sovereign debt is precisely part of the tried and tested IMF method. Implicitly, therefore, the Minister confirms that the IMF had been right all along this time when they criticized the other two members of the Troika for 'politics' in the 'rescue' of Greece.

That the establishment of the EMF is mainly politically motivated is underlined once more because the EMF does not do much differently than the IMF. As said before, in 2010, both in the German and Dutch parliament, it was absolutely essential that the IMF be involved in the rescue of the weak eurozone member states. This IMF support was deemed necessary because of the knowledge and experience that the IMF has on getting back on the road of countries in financial difficulties and because of its independence.

    If you are no longer talking about your own money, then as a country you are in fact no longer talking about anything

For the neutral spectator, the plans for an EMF therefore raise many questions. Why would you set up an EMF if an IMF already exists? And is not it much more obvious to rid the troika of its political component by dissolving it, and simply giving the IMF the task for which it was founded?
Consequences for the Netherlands

The establishment of an EMF also has far-reaching consequences for the Netherlands. The Dutch government would therefore do well to pay close attention to its case. Simply joining Juncker cum suis' plans means that the Netherlands swims in a trap from which return is practically no longer possible. Our parliament will therefore face a pressing question, in which its important budget right is de facto at issue. After all, if you are no longer talking about your own money, then as a country you are in fact no longer talking about anything.

The new Rutte-III government therefore has to consider some difficult issues. It is possible that the advice of the Council of State on the question of how the Economic and Monetary Union (EMU) within the current treaty frameworks can be strengthened, can provide the government with some policy-based handles. That advice is expected next month.

In a next article I will discuss the possible consequences that the plans could have for further integration of the euro zone for the Netherlands.

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