Propping Up the Euro with an Emergency Fund: A First Step in the Right Direction

A first step, but a (very) small one.

I haven't seen the details of the proposed emergency fund (or mechanism) but rumours are that it would be around €70 billion.

If that is the right figure, it's peanuts! It's just about 10 percent of the TARP launched by the US Treasury to save the American banking system from collapse after Lehman Brothers had defaulted in September 2008. I know that the Greek crisis - around some €130 billion, give or take a dozen - is much, much smaller than Lehman Brothers which was "worth" some $600 billion. But €70 billion is puny if it's supposed to prop up the Euro, considering that Portugal and Spain are certain to be the next target of speculators. And then Ireland, Italy...

In short, a fund is a first step in the right direction...assuming that all Euro-zone finance ministers have understood that the said "direction" is setting up a European-wide Treasury or Ministry of Finances, like the US Treasury.

But has the European political class understood what is at stake? I doubt it. Consider what props up the American Dollar and has kept it going through the worst storms we've seen in History, including the latest one, the Big Recession. The American Dollar has two legs that keep it walking: one is the Federal reserve, the other is the US Treasury. What has the Euro got? One leg only: the European Central Bank. And not a very strong leg either, because it is limited by mandate to focus only on fighting inflation (unlike the Federal reserve which covers much broader questions of economic growth, unemployment etc) So far, we've been lucky with Mr. Trichet, the ECB head, who looks well beyond inflation (in these deflationary times, a singularly irrelevant question) and talks about a "systemic crisis".

Right he is. It is a systemic crisis, because the Euro is lacking a second leg to stand on: there's nothing like the US Treasury. As I've pointed out in my previous blog, the Euro has only got the Maastricht Treaty and a bunch of (now largely irrelevant) parameters. Will adding a small fund to this sorry cocktail make a difference? I seriously doubt it. It's not a question of money, but a question of mechanism. What is needed is a mechanism to tap as much money as is needed. If 70 billion will do the trick, fine. But if more is required, the decision process cannot take weeks the way it has happened for Greece.

It won't work.

What will work? Obviously, setting up a Euro-zone wide financial ministry. Because Europeans are hopelessly nationalistic, it can't be done politically. What can? I'm curious to see what Mr. Barroso and the EU Commission are coming up with. We should know by Monday morning what exactly they've been cooking in Brussels and whether it will work.

That's for the short term. Over the medium term, I still think that more is needed than an emergency fund. Maastricht has to change: a set of rules that are rigid and immediately disregarded cannot be a serious foundation for a currency. What is needed is a supranational Ministry of Finance responsible to the Finance Ministers of the Euro-member countries.

If that's too much to ask for, forget the Euro. And forget Europe too!
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