Today the EU Commission launched a long-awaited set of concrete proposals to deepen European Monetary Union (EMU). The proposals are voluminous and in some areas detailed. Here’s a summary of the most important points and a first evaluation.

First, the European Stability Mechanism, currently intergovernmental, is to be transformed into a European Monetary Fund as a fully-fledged EU institution. Beyond the legal change – which is surely welcome, the intergovernmental solution having been chosen under the pressure of imminent crisis – the Commission envisages few functional changes. The main task of crisis-lending to Member States in need and the related ability to issue bonds to raise finance remain. New is that the EMF is to back-stop the Single Resolution Fund as part of the Banking Union. By providing guarantees or a credit line, and in parallel by reducing the policy areas subject to unanimity, the EMF will be able to offer swift assistance in the case of banking crises, plugging a notable hole in the policy framework. By underpinning confidence in financial stability, this should reduce the likelihood of its having to be used.

Reference is made to the possibility for the EMF develop new financial instruments “over time”. This is a door left open to a future extension of borrowing – and thus stabilization – capacity in the future.

Equally important, unlike in the vision of now-departed German finance minister Wolfgang Schäuble, the EMF is not foreseen to play a key role in disciplining member states and ensuring the implementation of structural reforms. Oversight responsibility is to remain unchanged (i.e. divided between the Commission and the Council). [Read more…]