Europe is seeking further assistance from the international community through the International Monetary Fund (IMF) to address the crisis in the euro area. The global community has a clear interest in aiding Europe. But the package being developed will be the largest ever adopted by the IMF and poses risks for that institution as well as the non-European members supporting it. The rest of the world thus deserves several things in return. One critical change to European decision-making should be among them.
Of course, any further European country requesting IMF assistance—Italy and Spain will need to roll over large amounts of debt in the coming year—must accept the usual conditions placed on financing. These include fiscal adjustment, restructuring of the banking sector, and structural adjustment. Structural measures are important to raising long-term growth—the key to making the servicing of debt credible in the long run. The European Central Bank (ECB) should contribute further, as European leaders are asking, and certainly should not reduce its exposure as non-Europeans increase theirs.
But the rest of the world deserves commitments from the euro area as a whole, as distinct from the individual member states, for the IMF coming to the rescue of the monetary union. The borrowing member is embedded in the euro area, the policies of its central bank in particular, and euro area governments’ decisions and statements determine the viability of the program. US Treasury Secretary Timothy Geithner and Undersecretary for International Affairs Lael Brainard have emphasized the establishment of a financial “firewall,” with enough lending capacity to stabilize sovereign debt markets. More fundamentally, the euro area must put together a great institutional leap forward, bringing discipline to fiscal policy in exchange for the ECB serving as a more complete lender of last resort.
Treaty changes to strengthen fiscal discipline within the union will not alone be sufficient to stem the crisis. Such treaty adjustments are a quid pro quo for German agreement in favor of fuller financial backing of their neighbors and ECB cooperation. A broader fiscal union could also smooth a path toward common fiscal responsibility for stabilizing the European banking system. Both of these would be useful in stemming the crisis. But any agreement by European leaders on treaty changes for such a fiscal union will have to be ratified by member states, a process with multiple stumbling blocks that could take several years.
Nonetheless, as the European leaders prepare for their summit meeting on December 8–9, the global community should press them to address the key weakness in how Europe decides to deploy financial facilities in crises. The international community deserves a partner in the euro area that can take decisions expeditiously and is not held hostage by the least forthcoming member. As witnessed by dithering over the deployment of the European Financial Stability Facility (EFSF), Europe’s response to the present crisis has been impaired by the rule requiring unanimity for approval of rescue packages. Moreover, unanimity has been designed into the decision-making process of the future: the permanent European Stability Mechanism (ESM). But effective international financial cooperation requires that this decision rule be abandoned. Europe’s international partners should insist that the euro area instead take these important decisions—those with respect to Europe’s share of joint financing programs in particular—by qualified majority vote.
Weaknesses in the design of the monetary union have brought the monetary union to the edge of a cliff, endangering international financial stability. The rest of the world has a vital interest in an institutionally stronger Europe.