EMF: Boom or Bust?

It seems that the debt crisis that took over Greece late last year is really putting pressure on euro zone officials to make sure that this doesn’t happen again. Experts and analysts believe that the conception of an EMF would create much needed political unity in the 16-nation zone, which would be a great help to battling all the financial problems that endanger the euro’s sustainability. Since the start of the year, the EURUSD has already tumbled down by almost a thousand pips – that’s a 7% drop in the euro’s value!

The EMF will be much like the International Monetary Fund (IMF) since it will watch over the financial systems of its member countries. It will do so by keeping in check their respective macroeconomic policies in order to foster growth and foreign exchange stability. The EMF, of course, will cater solely to the euro zone member nations.

The EMF would have the authority to ‘bail out’ any member country that is in risk of defaulting on their obligations. Aside from offering financial assistance with loans, the organization would also replace a country’s old debt with a new one that is backed by the EMF. In theory, having an organization with such ability would create the economic and fiscal unity amongst euro zone member nations that the ECB, based on what we are seeing now, cannot secure.

How the EMF will play out in reality, however, remains to be on the drawing board. What could this possibly mean for the euro zone?

The skeptic in me feels that it may take a long, long process before the EMF gets instituted, if it gets born at all. After all, it’s not like the euro zone members like to play nice. One reason why the EMF proposal was brought up was because of the lack of support from euro zone hot shot Germany towards Greece’s debt problems. Meanwhile, Greece has threatened to run to the IMF for help, which the European Union simply can’t allow.

Why not? Well it sends the signal that the European Union can’t handle its own business!

The creation of the EMF may also lead to some very touchy problems down the road. If the bulk of the fund came from better off nations, like Germany and France, would it entice weaker economies to take more risks, knowing that they could always be bailed out by the EMF? On the other hand, if the majority of the funding came from the weaker economies, wouldn’t it put them in a tighter spot and decrease their already diminished funds?

Still, the mere possibility that the euro zone could FINALLY put an end to Greece’s debt problems gave the EUR a strong boost yesterday. Heck, this Greek drama has been around for three months and running! Seeing a faint light at the end of the tunnel was enough to send the EUR bulls rejoicing. More than that, stronger fiscal coordination within the 16-member European mafia could reinforce the economic powers of the region, providing even more support for the EUR.

However, I can’t help but wonder… Would the euro zone be able to get this EMF show on the road or is it just all talk? Wolfgang Shaueble, Germany’s Minister of Finance, did say that the creation of an EMF isn’t entirely impossible. Would this proposal gain the support of all sixteen nations comprising the euro zone?

In their greatest strength lies their weakness, so they say. Recall that a similar proposal was made among the Asian regions way back in 1997. More than a decade has passed yet no agreement was reached – it’s not hard to imagine that the EMF plan could suffer the same fate.

  • Jambooman

    Why do they not use the European Central Bank to do all these stuff

  • Jambooman

    Why do they not use the European Central Bank to do all these stuff

  • Toekan

    Hoe different is a EMF in Europe as how the US deals with its problems with federal regions. In the US it is also centrally organized, which has not yet been taken care of in Europe. I think it is a logical step. The same was done in the US.

    By the way, what is all the fuzz about Greece. It is not like the Eurozone has to invest 7 trillion dollars the boost the economy. We are talking billions here. It was to expected the Greece would been bailed out, as will be doen for other countries as well. They will not let the Eurozone break apart after all the trouble they went into.

    ECB is not in place to make extrordinary budgets not direcftly related to the EURO. It is a country’s budget deficit that needs to be resolved, which cannot be done by raising or lowering the interest.

  • ForexGump

    Toekan pretty much sums it up! The ECB’s mission, as stated in the Maastricht treaty, is to make sure that inflation is below but near its 2% target. The terms of the treaty also state that the bank cannot provide special treatment to anyone of its member nations. Hope that helps!

  • Toekan

    Hoe different is a EMF in Europe as how the US deals with its problems with federal regions. In the US it is also centrally organized, which has not yet been taken care of in Europe. I think it is a logical step. The same was done in the US.

    By the way, what is all the fuzz about Greece. It is not like the Eurozone has to invest 7 trillion dollars the boost the economy. We are talking billions here. It was to expected the Greece would been bailed out, as will be doen for other countries as well. They will not let the Eurozone break apart after all the trouble they went into.

    ECB is not in place to make extrordinary budgets not direcftly related to the EURO. It is a country’s budget deficit that needs to be resolved, which cannot be done by raising or lowering the interest.

  • ForexGump

    Toekan pretty much sums it up! The ECB’s mission, as stated in the Maastricht treaty, is to make sure that inflation is below but near its 2% target. The terms of the treaty also state that the bank cannot provide special treatment to anyone of its member nations. Hope that helps!