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Friday, October 25, 2013

The IMF says Europe needs a central budget authority

The International Monetary Fund (IMF) has published a report calling for the Euro Zone nations to create a central budget authority. The thinking behind the recommendation is that such a move will enable the Euro Zone area to deal better with any future economic downturns.

Specifically, the IMF believes that should one nation suffer a downturn, as we’ve seen Greece, Spain, and others do in recent years, then the rest of the Euro Zone economy won’t be impacted if a central budget authority is in place.

Footing the bill

The IMF has proposed increased pooling of capital reserves
That the IMF has published this report is somewhat surprising. The European Union (EU) already made similar recommendations last year, only to see Germany and the other ‘better off’ Euro Zone nations dismiss them.

The concerns of these nations stem from a belief that they are, in effect, being put in a position to foot the bill should a weaker nation on the periphery hit economic trouble in the future.

Although the report does point to this as a solution, it also says that, "[Fiscal] risk sharing means that, at any point in time, countries experiencing better cyclical conditions support those at the other end of the spectrum; it does not mean the same country is always on the giving or receiving end."

Given that recent years have seen very few Euro Zone nations in a position to support the rest of the economic area, it is unsurprised that those like Germany are resisting.

Taking advantage

This is a specific recommendation proposal from the IMF, who in the past have made suggestions related to the ‘pooling of resources’ but never tackled the subject so directly. In effect, they’re telling Euro Zone nations to save money so that, when it is needed, it is there.

Although Germany, where Angela Merkel has been re-elected as Chancellor for a third term, haven’t said so directly, they’re surely concerned that the traditionally weaker countries will use this as an excuse to not manage their national budgets effectively and forget the lessons of the last three to five years.

The IMF is also proposing that different funds are set up for different needs. For example, they’re saying that if a country is experiencing higher than usual unemployment, then money can be taken to pay unemployment benefits rather than eating into national expenditure budgets unexpectedly.

Protecting the future, now

Although the report is related to any future potential economic crises, the IMF is clear that they would like to see action now, to immediately deal with failing Euro Zone banks and prevent any further losses from these institutions.

The IMF’s reasoning behind these recommendations appears sound. This is true particularly given the sums raised will dwarf the EU budget should the initiative go ahead, and there won’t be as much red tape attached to accessing and using the funds.

However, it is unlikely that the nations who probably won’t make use of such a fund are going to be convinced it is a good idea anytime soon.

About the author: Danny is a finance entrepreneur who is currently looking to pay cash for annuity. Danny also has several investments in Europe, with a lot of money tied up in various countries that are still currently struggling to grow their economies.
* Image license: AranJuez1404, CC BY-SA 2.0