The discussion about installing a European Monetary Fund (EMF) seems to gather speed. Not only has Thomas Mayer together with Daniel Gross proposed an EMF erlier this year (see here for their original paper), but also the German Finance Minister Schaeuble has argued in the same direction over the weekend and now as Bloomberg reports, the EU Commission seems to be ready to propose an EMF-type instrument. As reported, the proposal should be ready by June. This highlights that the political will to continue with the European integration project remains strong.
Such an EMF - depending on how it is done - could go a long way in addressing some of the shortcomings of the Eurozone (it is frequently stated that no currency union has survived without a fiscal union).
The stability and growth pact tried to partially correct for some of the shortcomings in establishing limits on debt and deficits. The hope was that the SGP would force a sustainable path for the sovereign sector and in turn there would never arise a situation where a sovereign would risk bankruptcy and/or be in need of member-states' bailout money. However, even before the SGP was dramatically weakened it failed to enforce fiscal sustainability.
An EMF - besides acting as a lender of last resort - could provide stronger incentives to promote fiscal sustainability in the first place. For one, Gross and Mayer propose that the EMF would be financed by a fee based on the fiscal deficit exceeding 3% and on the sovereign debt exceeding 60% of GDP. Finally, the EMF would also manage an orderly default of a member state.
Such an EMF for the Eurozone would clearly strengthen its institutional set-up and render it more resilient against shocks via a) the promotion of fiscal sustainability during good times and b) the support provided during a crises.
I personally am clearly in favour of such an EMF, even though it might take a long time to set it up and even though the institution which will likely be established will be far from perfect. However, it still cannot account for the fact that the Eurozone is not an optimal currency area and especially labour mobility between countries remains relatively low. Asymmetric shocks in such a set-up will continue to hit member states again and again.