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European Monetary Fund debate: the main points

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(BRUSSELS) - Intensive debate on proposals mainly from Germany to create an emergency fund to rescue eurozone economies has posed more questions than answers so far. Here are the main points agitating political and market players:

WHY HAS THE DEBATE COME UP?

The leading economies among the 16 countries forming the eurozone, with Germany to the fore, do not want the Washington-based International Monetary Fund poking its nose into their affairs, which would be perceived as failure for the decade-old European monetary union. But the Greek debt crisis, and threats from Athens to ask the IMF for help if Europe does not help it ward off pressure on bond markets, has forced new ideas out into the open.

IS A EUROPEAN VERSION OF THE IMF NEW?

No. Similar, regional insurance funds are being set up elsewhere, notably among members of the Association of Southeast Asian Nations, plus China, Japan and South Korea. ASEAN groups Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. This fund would hold 120 billion dollars (90 billion euros) in the event of major liquidity issues for subscribers. Latin American countries also want to create a regional alternative to the IMF through their Bancosur lender, launched in 2007 An African fund is likewise under consideration.

WHAT IS THE PURPOSE OF A EUROPEAN MONETARY FUND (EMF)?

Not to help Greece, because even the scaffolding for proposed EMF models could take months, if not years, to erect. Paris, as a result, believes that the idea is not an immediate priority. Other splits are also emerging: while some are placing the emphasis on the EMF as a lender of last resort, the Germans especially see it as a mechanism to strengthen budgetary discipline within the European Union, with strict penalties for lax countries built in.

WHAT IS THE LEGAL BASIS FOR AN EMF?

German Chancellor Angela Merkel says EU treaties, which currently forbid eurozone countries from coming to the financial rescue of another, must be changed. That could prove laborious in the extreme, going by the years of referendums and special exemptions required to ratify the Lisbon Treaty, which took effect only in December. France has little appetite for new treaty negotiations. Other expert voices, though, suggest it would be possible to create a fund using existing treaty scope for strengthened cooperation between countries. However, the European Commission could be expected to see this as unwelcome as the entity would fall outside its control.

HOW IS IT TO BE FINANCED?

The debate has only just begun. Would an EMF be restricted solely to the eurozone, or would it encompass all 27 EU countries? Two economists, Daniel Gros and Thomas Mayer, have suggested that this fund operate as an insurance scheme based on eurozone country premiums. The less disciplined a country is in budgetary matters, the more it would pay in.


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