BRUSSELS WATCH: Eurozone Bailout Fund Eyes Wider Future Role

- Consensus Forging in Brussels on Need To Build on Euro Bailout Fund

- Views Diverge on Set-Up of a 'European Monetary Fund'

By Jean Comte

     BRUSSELS (MNI) - With the Greek bailout programme scheduled to an end in

one year, the 170 staff of the Luxembourg-based European Stability Mechanism

(ESM) are wondering what they will do next.

     Luckily for them, a consensus is forging in EU institutions about the need

to give their institution a stronger role.

     The ESM, set up in 2012, provides emergency liquidity to countries

experiencing severe financing problems in exchange for implementing

comprehensive structural reforms agreed by the country and the European

Commission.

     It has been overseen since its inception by the German Klaus Regling, whose

mandate has been extended until 2022. The ESM is broadly viewed as successful,

leading repeated bailouts for Greece and providing financing to Portugal,

Ireland and Spain.

     In the years to come, it will likely see its role slightly expanded by new

crisis management functions, such including being used as an emergency

'backstop' for the Single Resolution Fund for banks, and possibly for a

euro-area deposit insurance scheme still under negotiation.

     -- ESM vs. IMF --

     Some EU officials also hope that it will take a more expanded role in

future country bailouts, as a counterparty for a smaller involvement of the

International Monetary Fund.

     Negotiations with the Washington-based institution have been difficult on

the Greek program - with the IMF asking for debt relief and EU institutions

claiming this was impossible.

[https://mninews.marketnews.com/content/greece-watch-disbursement-approved-imf-b

oard]

     "I don't know if there will be an involvement of the IMF in the next

euro-area crisis," a senior EU official said. "If there is, its role will be

totally different, it will be much less significant."

     The IMF is also conducting an internal review of its regional arrangements,

something that could eventually have an impact on its interaction with the euro

area.

     -- BEYOND THE EMERGENCY ROLE? --

     But the ESM could also be given an ongoing task beyond emergency or crisis

function. The idea of turning it into a "European Monetary Fund" has received a

new push in the last few months in the context of broader reflections on the

future on the Eurozone.

     "The ESM has a lot of expertise and a lot of fire-power. It's huge," one EU

diplomat said. "It would be a shame not to build on this experience."

     The problem is that nobody seems to agree on what a 'European Monetary

Fund' would be and what exactly it would do.

     The EU Commission discussed the issue in depth in a 'reflection paper' on

the Eurozone published at the end of May.

[https://mninews.marketnews.com/content/eu-comm-suggests-possible-roadmap-comple

te-emu-2025].

     But the idea was presented as part of suggestions for a wider reshuffle of

euro area institutions, including the creation of a European treasury, the

set-up of a counter-cyclical fiscal capacity, and exploring the idea of a "safe

asset". It would take a long time to be implemented as it would require a

radical transformation of the institutional system.

     Jeroen Dijsselbloem, current president of the Eurogroup, wants to give the

ESM a "preventive mandate", meaning that it would carry annual assessments of

the EU countries' economy - similar to the "article IV" reports published each

year by the IMF. The move appears more feasible, but would create a duplication

given that the EC already publishes several detailed studies and forecasts per

year.

     German Finance Minister Wolfgang Schaeuble pushed last year to make the ESM

the guardian of the fiscal treaties; that is, to make it responsible for

overseeing that EU regulations on public debt and deficit are respected, and

deciding on possible "procedures" against member states who aren't playing by

the rules. 

     But all the sources who talked with MNI said the move was impossible, as

the Commission was unlikely to give away this power. Regling himself told the

German newspaper Handelsblatt that the plan was "unrealistic".

     -- REGLING PUSHING FOR BIGGER ROLE --

     Regling is widely said to be eyeing a more substantial role for the ESM.

Several sources, including people who have spoken directly with him on the

matter, told MNI that he would be more than happy to see the mandate of its

institution broaden significantly.

     "He has worked a lot to build up his institution from the very beginning.

He would see an extension of its role as a consecration," one of the sources

said.

     His public comments have nevertheless been cautious. In his Handelsblatt

interview, he focused on bailouts, saying that: "The IMF will no longer be

present in case of future crises and nor, probably, will the ECB. (...)

Therefore I think that a European Monetary Fund would do that together with the

Commission in the future."

     "There are very many different ideas. The discussion on this has just

started," he added.

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

[TOPICS: MX$$$$]