BERLIN – Engineering a financial bailout for Cyprus in March was such a chaotic process that top European officials say it is time to rethink how the region manages its crisis — and who should be involved.
Officials say the International Monetary Fund, which has contributed financial expertise and billions in emergency loans, may no longer be needed as a key decision-making partner. And they say that the eurozone would be able to make decisions and take action more quickly if it wasn’t bound by the need for unanimous agreement among its 17 member countries.
These concerns have been raised before by analysts and government officials outside of Europe, but now two of the region’s leading financial decision-makers have said publicly that something needs to be done. Olli Rehn, the top economic official at the European Commission — the European Union’s executive arm — and Joerg Asmussen, who sits on the European Central Bank’s six-member executive board, said at a hearing last week that the easing of the financial crisis presents an opportunity to fix what is broken.
“If the IMF can take decisions with an 85 per cent majority and not with unanimity, why on earth the eurozone cannot do so?” Rehn asked, referring to the IMF’s executive board. “That would make our decision-making more effective.”
And Asmussen questioned whether help from the IMF — part of the “troika” of decision makers that also includes the ECB and the European Commission — is even needed anymore. In effect, he said it is time for Europe to handle its problems without outside help.
Commerzbank analyst Christoph Weil says European leaders are slowly waking up to what has been evident to financial markets for a long time. “The current decision structure is dysfunctional,” Weil said. “It was born in the urgency of the crisis … It needs to be overhauled.”
The 17-country eurozone has been severely tested by a three-year crisis over too much government debt which has seen five of its members bailed out — Greece, Portugal, Ireland, Spain and Cyprus.
The “troika” arrangement to monitor the bailout process has been in place for eurozone bailouts since Greece’s debt problems began to unfold in 2010. The setup gives a prominent role to the Washington-based IMF — although it contributes much less money to bailouts than the eurozone nations.
Some eurozone member countries insisted on having the IMF on board for its experience in handling such crises around the world. Germany — Europe’s biggest economy — also saw the fund’s presence as a crucial check against political horse-trading that could have resulted in watered-down bailout conditions.
However, the troika’s inspection teams have been heavily criticized for their insistence on harsh austerity measures that have plunged countries like Greece or Portugal in a yet deeper recession and that they’re not answerable to voters.
“The Europeans wanted the IMF aboard for its expertise, even though many at the IMF thought that Europe is economically strong enough to solve its problems on its own,” said analyst Weil.
“Now the Europeans feel stronger, and they realize that it would have been easier sometimes without the IMF, who insisted on radical up-front measures in Greece or Cyprus before granting aid,” he added.
This view was given a boost last week by the ECB’s Asmussen during a hearing at the European Parliament’s economic committee in Brussels.
“I would not change the troika system in the midst of the crisis because we have no alternative available right now but in the longer-term future … we should return to a fully EU-based system,” he said.
The IMF recognizes that it’s up to the EU’s executive arm, the Commission, and the ECB as to whether it has a role to play in future bailouts, fund spokesman Gerry Rice said.
“I understand from reports that Mr. Asmussen underscored that he would not advise to change the troika system right now,” he said.
In place of the IMF, Asmussen suggested the eurozone could use the body set up to manage its permanent 500 billion euros rescue fund, the European Stability Mechanism. However, the makeup of the ESM means that it is currently technically outside of the EU’s system of institutions.
“The setup is a bit of a stranger decided in a crisis mood,” Asmussen said. “We had nothing else available and it had to be done quickly,” he added.
The end of the troika arrangement would come once the ESM will be fully turned into an institution of the 27-nation European Union, he added. The ESM could then play its role as Europe’s IMF.
As well as looking at the IMF’s role in international rescues, the Eurogroup – the meeting of the eurozone’s 17 finance ministers, IMF and ECB – has also come under the microscope.
The Eurogroup was initially planned mostly as a forum to exchange views on economic and financial policies — but the crisis has turned it into a major decision-making body. At the moment, it has to reach a unanimous agreement on its decisions — a daunting call when 17 ministers try to forge a deal.
The cumbersome decision-making process reached its climax when the bloc fought bitterly over a 10 billion euro bailout for Cyprus.
In March after marathon negotiations, the Eurogroup and Cyprus patched together a bailout agreement that shocked markets and Cypriots. Cyprus’s banks had their assets frozen and a one-time levy on all bank deposits was imposed to help pay for the rescue — a measure that violated EU deposit insurance rules guaranteeing all savers with fewer than 100,000 euros in their bank accounts. It was scrapped about 48 hours later.
Meanwhile, the ECB, seemingly fed up with the politicking, set a deadline for a deal after which it would cut off emergency funding for Cyrpus’s banks— a move that would have plunged the country into chaos and out of the eurozone.
So, about a week later, the finance ministers descended again on Brussels. The second agreement saw Cyprus’ insured depositors protected, but enforced a harsh restructuring of the country’s outsized banking sector and heavy losses for those holding deposits worth more than 100,000 euros.
Another example of the Eurogroup’s cumbersome decision-making was seen this week at a meeting to thrash out crucial details of the bloc’s banking union — a complex project that’s seen as vital to help stabilize the EU’s financial sector and turn the tide on its crisis — but failed to make much headway. At the moment they can neither agree how far-reaching the banking union ought to be, nor how fast they want to move in setting it up.
Analysts maintain a reform of the Eurogroup is long overdue, but it’s fraught with difficulty: A simple majority vote could mean small countries ganging up and overruling the few big ones while a system based on economic strength would mean Germany and France alone would hold almost 50 per cent of the voting rights.
But the EU already has the answer. The ESM boasts a voting system that combines both, the number of countries and their economic weight. That makes it difficult to overrule countries but it is still possible to reach a decision if there are only few and small holdouts.
Europe’s currency — used by more than 330 million people — is still a relative teenager, it was launched in 1999, “but it has grown up rapidly amid the crisis,” German Finance Minister Wolfgang Schaeuble said.
But while it has evolved into the world’s second-most important currency trailing only the dollar, its institutional doldrums seem far from over despite the optimism bolstered by the recent stabilization.
“We’re still in the process of curing the teething troubles of the euro. Now that the acute pressure is easing, it gets more difficult again to push through sweeping reforms,” said analyst Weil.
Marjorie Olster in Washington D.C. contributed to this report.
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