As part of our ongoing debate into the future of the Euro (see here, here, here and here), we spoke to Nemat Shafik, the Deputy Managing Director of the IMF, and asked her to respond to those commenters calling for the abolition of the Euro. Dr. Shafik began with a glowing commendation of the achievements of European integration thus far:
We must remember that Europe has a great legacy of economic cooperation and coordination. The process of European integration—culminating in economic and monetary union among sovereign nations—is the greatest collaborative economic venture ever undertaken on the continent.
The Eurozone crisis, however, threatens to undo these economic achievements.
While the EMU’s economic performance since its inception had been impressive the crisis has been a timely reminder that EMU was and still is work in progress. The benefits from economic and financial integration have been significant, but at the same time, the EMU failed to appreciate that tighter integration also meant a higher risk of contagion and that difficulties in one part of the euro area could not simply be addressed with national approaches.
The IMF’s solution? “More Europe”, deeper integration and closer economic cooperation and coordination between states.
Thus, the only solution is greater collaboration and deeper integration. The only viable option for Europe’s debt crisis is a comprehensive and consistent solution, a cooperative solution, a shared solution. Certainly, the crisis countries must themselves take the tough policy measures required to return to economic health, most notably, sound and consistent medium-term policy frameworks that are effectively implemented and supported by structural reforms that unleash productivity and provide the basis for sustained and inclusive growth. But these actions need to be supported by other euro area members in word—through helpful communication—and deed—through financing on terms that promote debt sustainability.
Dr. Shafik then lists a series of priorities that the IMF believes Europe needs to tackle in order to restore calm to its markets. These are the IMF’s policy prescriptions for solving the Eurozone crisis:
- First, Europe needs to strengthen further its area-wide crisis management frameworks—confirming its coordinated response to a common problem.
- Second, Europe needs to fix unresolved financial sector problems. Now more than ever, says Dr. Shafik, we need to complete financial integration—to restore area-wide financial health. That means raising capital following the recent stress tests, allowing strong banks to take over weak ones, also across borders. Dr. Shafik believes the focus should be on private sector solutions as taxpayers’ money has already been put too much at risk. This will also mean adopting a single rulebook, harmonizing supervisory practices, making rapid progress toward an area wide crisis management and resolution framework with adequate fiscal burden sharing.
- Third, the euro area needs more fiscal and macroeconomic coordination that preserves ex-ante adequate checks and balances—essential in economic and monetary union. This includes more effective policy coordination and better surveillance over domestic and external imbalances.
- And finally, completing European integration means forging ahead with the single market for both services and labor. In the modern European Union, it makes no sense for either equity capital or workers to be blocked at borders by barriers from a bygone era. These barriers exacerbate the divergences that threaten the euro area today. We must support area-wide social cohesion for more broad-based and equitable growth.
What do you think? Agree? Disagree? Let us know in the comment section below.