Europe needs to bulk up its planned permanent euro rescue fund, take politics out of its decision- making and use it as a building block in a global financial firewall, a former International Monetary Fund official said.
Euro leaders should raise the 500 billion-euro ($660 billion) limit on lending once the permanent fund, the European Stability Mechanism, goes into operation in July, said Alessandro Leipold, a former acting director of the IMF’s European department who is now chief economist of the Brussels- based Lisbon Council, an independent research group.
To avoid the “too many cooks” syndrome that has plagued Europe’s crisis response, more of the fund’s decision-making must be delegated to its day-to-day managers with the overall lead coming from the IMF, Leipold said.
“The costs of Europe’s learning-by-doing have been evident in many areas of the present crisis,” Leipold wrote in a Lisbon Council policy brief. “The ESM’s governance structure appears doomed to continue to yield slow decision-making, poor communications, and a dominance of national preoccupations.”
European leaders will decide in March whether to boost the lending limit once the permanent fund starts running in parallel with the existing temporary fund, the European Financial Stability Facility.
At the very least, Leipold said, the EFSF’s outstanding loans shouldn’t be counted against the limit and governments should expedite the setup of the new fund by paying in two annual installments in the first year.
The ESM’s ground rules also set too high a bar for countries to qualify for precautionary lending and make it difficult to put together a standby credit line in an emergency, Leipold said.
“Some key crisis-prevention or management tools do not appear to be readily available in the ESM’s arsenal -- or, in any event, their deployment risks being subject to lengthy negotiations,” he wrote.
Because Europe’s ability to provide its own crisis insurance is undercut by the risk of domino effects within the tightly integrated monetary union, the ESM should be complemented by a global firewall, Leipold said.
“A European stability mechanism can be helpful and succeed only as part of a broader system of multilateral co-insurance,” Leipold wrote. He urged the revival of talks over a global restructuring mechanism that was considered in the 1990s.
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