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27th Nov 2021

IMF anti-crisis recipe puts pressure on Germany

  • IMF chief Christine Lagarde wants EU leaders to consider six steps when they meet next week (Photo: International Monetary Fund)

The International Monetary Fund (IMF) on Thursday (21 June) outlined a series of measures it says should be taken if the eurozone crisis is to be overcome, including more cental bank intervention and allowing banks to be funded directly by bail-out funds - two ideas Germany opposes.

Markets continue to "question the viability" of the eurozone and put banks and governments under "acute stress," IMF chief Christine Lagarde said in a press conference at the end of six-hour talks with eurozone finance ministers in the Eurogroup.

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"A determined and forceful move towards completing the economic and monetary union is needed to restore faith in the system," she said, outlining six steps the IMF will propose to EU leaders when they meet next week.

Concluding an annual review of the situation in the eurozone, the recommendations are more in line with southern countries' views on how to overcome the crisis than those of Berlin.

Among the three short-term measures envisaged by the IMF is a "creative and inventive monetary policy" by the European Central Bank - be it through a lower key interest rate or a resumption of the bond purchasing programme that last year brought Italy and Spain's borrowing costs down.

"We believe the ECB has the space to do so," Lagarde said, despite recent comments by ECB officials that they are not considering further intervention - a position in line with German central bank thinking.

Another short-term measure - again viewed dimly in Germany - is to give banks direct access to the eurozone bail-out funds, so as to "break the negative feedback between banks and sovereigns governments."

Berlin continues to insist that the current rules of the bail-out funds be respected. This means that any aid for national banks has to go through the government. A bail-out for the Spanish banks is to be negotiated in the coming weeks and decided on 9 July, with the IMF set to be involved with expertise in drafting the reforms plan for the banking sector.

Asked whether Germany has signalled a shift in its position on the direct funding for banks, Lagarde said she hoped "wisdom will prevail and that the best solution will be at least looked at, when weighed against its drawback."

In line with German demands, however, are other points, such as further ceding of sovereignty on the fiscal front, more democratic control and oversight and "intermediate steps towards limited sharing of funds, be it bonds or bills, between member states, but conditional on more centralised control and compliance."

Plans for a "banking union" being considered next week by EU leaders should include common European supervision (a German demand), clear rules for banks being let go or rescued and a eurozone-wide deposit insurance.

The European Commission "agrees with the IMF proposals, especially on breaking the negative feedback loops between sovereign and banks," economics commissioner Olli Rehn said during the same press conference.

He dampened hopes of a long-term plan to be ironed out next week, however, saying that EU leaders are likely to define only the working method and "agree in the fall on a roadmap towards the economic and monetary union 2.0."

"We are rebuilding the EMU at this critical juncture," he said.

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The 9 July start for the eurozone's €500bn bail-out fund is set to be delayed as Germany waits for a ruling by its highest court - a move adding to the woes of Italy and Spain.

Analysis

Eurozone crisis tests the Merkel method

The daughter of a protestant pastor, Germany's Merkel has a near-religious conviction that by cutting debt, European economies will be cured of all ills.

Merkel under pressure to move on Spain and Italy

With borrowing costs in Spain and Italy at unprecedented highs, Germany's Angela Merkel came under pressure at the G20 summit to let eurozone bail-out funds help them out.

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