IMF: EMU Needs More Fiscal Integration, Full Banking Union
FRANKFURT (MNI) – The Eurozone must lay out a clear path toward
more extensive fiscal risk-sharing while swiftly implementing necessary
crisis-fighting measures, the International Monetary Fund said in a
staff report released Wednesday.
“The euro area crisis has reached a new and critical stage,” the
report warned. “Despite major policy actions, financial markets in parts
of the region remain under acute stress, raising questions about the
viability of the monetary union itself.”
While welcoming the decisions of EU leaders on June 28-29,
including a shared supervisory framework, as “steps in the right
directions”, the IMF called for more progress towards a full-fledged
banking union, including a pan-European deposit insurance guarantee and
bank resolution framework as well as broader fiscal integration.
“Only a convincing and concerted move toward a more complete EMU
could arrest the decline in confidence engulfing the region,” it said.
“A credible roadmap toward a full banking union and fiscal integration
will make the short-term crisis measures more effective.”
While a banking union should be put in place as quickly as
possible, the necessary “substantial re-orientation of sovereignty and
burden-sharing” may take some time,” the report said. Nevertheless,
policy-makers “should deliver a schedule of discussions, decision and
As a first step towards more fiscal integration, the IMF suggested
a “limited but scalable introduction of common debt, with appropriate
governance safeguards.” Jointly issued debt could “at first be
restricted to shorter maturities of small size and be conditional on
more centralized control (e.g., veto powers over national deficits, the
pledging of national tax revenues).”
The IMF also raised the controversial idea of giving the ECB
“explicit responsibility for financial stability and full
lender-of-last-resort functions.” However, this could imply much broader
risk-sharing with less control and would violate the Maastricht Treaty.
For the shorter term, the IMF said that agreements reached at the
June 28-29 summit, “if implemented in full, will help break the adverse
links between sovereigns and banks and create a banking union, in line
with the Article IV mission recommendations.”
“In particular, once a single supervisory mechanism for euro area
banks is established – with key decisions to be taken by end-2012 – the
ESM would be able to recapitalize banks directly. Moreover, ESM
assistance will not carry seniority status for Spain – an important step
to support market confidence,” the report said.
The fund also welcomed the leaders “willingness to consider
secondary purchases of sovereign bonds by the EFSF/ESM, although without
expanding the resource envelope.”
“Implementing these measures in a timely way would help restore
longer-term confidence in the union,” the IMF said. However, it
cautioned that high hurdles to implementation remain.
“The ESM has not yet been ratified by all members, the timing of
pan-euro area supervision remains uncertain, and many of the announced
measures will require unanimity by Eurogroup ministers. Furthermore,
crucial questions on the terms for direct euro area bank
recapitalizations still need to be addressed,” the report cautioned.
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