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The European Monetary Fund. A systemic problem needs a systemic solution

  • Stephan Schulmeister

The deepening of the debt crisis in the euro area is due to three systemic causes which national governments are not able to overcome on their own. First, being members of a monetary union euro states cannot dampen or even reverse the rise in public debt through devaluations. At the same time, they have no access to funds from a national central bank. Second, under ?finance-capitalistic? framework conditions, speculators systematically exploit and strengthen the fiscal troubles in the weakest countries by driving up CDS premia and interest rates to unsustainable levels. This development might transform a liquidity crisis into a solvency crisis. Third, these speculative activities widen the interest rate differentials within the euro area drastically thereby endangering the economic and political cohesion of the EMU and even of the EU. A systemic solution which restores the primacy of politics over speculation needs to stabilize interest rates for all euro countries. It is proposed to transform the European Stability Mechanism (ESM) into an agency for financing euro states, the European Monetary Fund (EMF). It would provide governments with financial means by selling Eurobonds. These bonds are guaranteed by all euro countries to an unlimited extent. The EMF would stabilize Eurobond interest rates at a level slightly below the level of medium-term economic growth (in nominal terms). The Eurobonds are held by investors with the EMF, they are not tradable but can be liquidated at any time. The EMF helps to restore sound public finances in euro countries in close cooperation with the ECB, the European Commission and national governments. To this end, the EMF provides funds for the euro states according to clear criteria (?conditionality?) which are not exclusively restrictive. JEL Classification: E000, F330, G280.

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Article provided by Presses de Sciences-Po in its journal Revue de l'OFCE.

Volume (Year): N° 127 (2013)
Issue (Month): 1 ()
Pages: 389-424

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Handle: RePEc:cai:reofsp:reof_127_0389
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  1. Stephan Schulmeister, 2010. "Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the Effects of a Financial Transactions Tax," WIFO Working Papers 364, WIFO.
  2. Peirce, Fabrizia & Micossi, Stefano & Carmassi, Jacopo, 2011. "On the Tasks of the European Stability Mechanism," CEPS Papers 4262, Centre for European Policy Studies.
  3. Paul De Grauwe, 2011. "The European Central Bank: Lender of Last Resort in the Government Bond Markets?," CESifo Working Paper Series 3569, CESifo Group Munich.
  4. Mayer, Thomas & Gros, Daniel, 2011. "Debt reduction without default?," CEPS Papers 4150, Centre for European Policy Studies.
  5. Jean Pisani-Ferry, 2012. "The Euro crisis and the new impossible trinity," Policy Contributions 674, Bruegel.
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