By LEIGH PHILLIPS
The International Monetary Fund has bluntly warned the European Union it must put an end to its “unproductive debate” over debt restructuring and, in an unprecedented outside intervention in the construction of the European Union, told the bloc it must integrate faster and more deeply in order to stop a global disaster.
Using much of the same censorious language about the EU that the EU has used about Greece, the international lender told the bloc to act “now” and that its handling of the situation “needs attention”.
While “courageous attempts” have been made by the eurozone to address the crisis, “failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers,” read a report of the Fund’s review mission investigating the effectiveness of eurozone policies, published on Monday (20 June).
Saying Europe is at a “crossroads”, the IMF’s acting director, John Lipsky, in Luxembourg for a meeting with EU finance ministers, declared: “The euro area needs to strengthen economic governance and may need to be more intrusive in terms of national structures.”
Warning that all the euro area’s efforts so far, including the so-called six-pack delivering economic governance, the EU semester system and the Euro Plus Pact while welcome, are not enough to prevent “global spillovers” from the crisis, the IMF said that still “more economic and financial integration” and EU intervention in national economies is necessary.
The Fund’s European director, Antonio Borges, even went so far as to compare the unification process unfavourably to that which happened in the United States over a century ago.
“We really believe that many of the current problems result from incomplete integration,” he told reporters upon presentation of the report.
Specifically, the report mentioned that “without political union” and fiscal transfers, “stronger governance of the euro area is indispensable.”
The report also demanded deeper integration of labour markets, the flow of goods and services markets and, crucially, capital.
The IMF’s EU report also said the ECB should proceed “gradually” and “cautiously” in hiking interest rates so as to “limit stress” to the eurozone periphery.
The report went on to say that the EU needs to announce what it will do to resolve problems in the banking sector before stress test results are announced, adding that preference should be given to market-based solutions, but that “public support may be necessary … in a manner co-ordinated across the EU.”
The IMF called for progress towards common depositor insurance, banking management and crisis prevention, with a European Resolution Authority the “ultimate goal” backed by a deposit guarantee and resolution fund to deliver a “euro area centred backstop for both liquidity and solvency support.”
In its sharpest language, the document said: “It will be essential to bring the unproductive debate about debt reprofiling or restructuring to closure quickly.”
“Policies to stop contagion from sovereign debt adjustment or re-profiling are at a premium.”