Christine Lagarde, the head of the IMF, has jumped into the internal politics of the EU by unveiling plans for "a rainy-day fund" for the eurozone to help cushion the next economic downturn - a proposal about which some northern countries are highly unenthusiastic.
In a speech in Berlin on Monday, Ms Lagarde compared such a fund to car insurance, with a premium in good times based on the benefits a country receives in bad times. She added that it could halve the size of a downturn for "the relatively modest cost" of 0.35 per cent of gross domestic product a year.
“By itself, the capacity may not be enough to solve the next crisis - but it certainly would help,” the IMF managing director told the DIW think-tank in the German capital.
Her proposals complement the campaign by Emmanuel Macron, France's president, for closer economic and monetary union, including a sizeable common EU budget. Ms Lagarde herself, a former French finance minister, is thought to want to return to Europe in a big role, possibly as European Commission president, for which she would need Mr Macron's support.
Northern alliance
But a number of northern EU countries - notably a coalition of eight fiscally conservative member states led by the Netherlands - are reluctant to contribute to such a fund and fiercely oppose some of Mr Macron's proposals.
The northern alliance also includes Nordic and Baltic countries and Ireland.
Germany, which is not part of the Dutch coalition, is also lukewarm about Mr Macron's budget plans.
In a nod to the coalition’s complaints that it would be left on the hook for the profligacy of other member states, Ms Lagarde said the IMF’s proposal would be “a temporary cushion and not a permanent pillow”.
“Our suggested approach requires members to take greater responsibility for putting their own houses in order,” she said.
Fund details
Her remarks tie in with the publication of a paper by IMF economists on Monday which details how the rainy-day fund would work. The commission is expected to publish its own proposals in May, but officials say a consensus on the issue has not yet been reached.
“We don’t understand why fiscal capacity is necessary; the weather is nice and everyone should lower their national debts,” said a senior euro zone diplomat. “The first question should not be how to construct a fund for extra fiscal capacity. You should ask instead when and why.”
A central idea behind such a fund is to take some of the weight off the shoulders of eurozone monetary policy to stave off an economic downturn. Instead, it would place more emphasis on governments using the fiscal resources available to them.
A separate facility, the European Stability Mechanism, would be used in the event of a more serious economic collapse, such as the crises that afflicted Greece over the past decade.
Drawing down
Under the IMF’s proposals, governments could draw down on the funds when unemployment rose above a seven-year average rate for their economy.
In addition to countries’ contribution of 0.35 per cent of GDP each year, the rainy-day fund could also finance itself privately “in extreme circumstances”. The IMF believes it could do so at rates similar to those investors demand from the European Stability Mechanism.
Ms Lagarde argued that the design of the rainy-day fund would alleviate tension over risk-sharing between northern and southern countries.
Under the rainy-day fund, countries would be both creditors and recipients, depending on where they were in the economic cycle, and fiscal transfers would not be permanent.
- Copyright The Financial Times Limited 2018
