Officials: Overhaul Europe’s aid triad

People wait outside a branch of Laiki Bank in Nicosia, Cyprus, in late March, when efforts to engineer a financial bailout for the country proved chaotic for European officials.

People wait outside a branch of Laiki Bank in Nicosia, Cyprus, in late March, when efforts to engineer a financial bailout for the country proved chaotic for European officials.

Saturday, May 18, 2013

BERLIN - Engineering a financial bailout for Cyprus in March was such a chaotic process that top European officials say it is time to rethink how the region manages its crisis - and who should be involved.

Officials say the International Monetary Fund, which has contributed financial expertise and billions in emergency loans, might no longer be needed as a key decision-making partner. And they say the eurozone would be able to make decisions and take action more quickly if it weren’t bound by the need for unanimous agreement among its 17 member countries.

These concerns have been raised before by analysts and government officials outside Europe, but now two of the region’s leading financial decision makers have said publicly that something needs to be done. Olli Rehn, the top economic official at the European Commission - the European Union’s executive arm - and Joerg Asmussen, who sits on the European Central Bank’s six-member executive board, said at a hearing last week that the easing of the financial crisis presents an opportunity to fix what is broken.

“If the IMF can take decisions with an 85 percent majority and not with unanimity, why on earth the eurozone cannot do so,” Rehn said, referring to the IMF’s executive board. “That would make our decision-making more effective.”

And Asmussen questioned whether help from the IMF - part of the “troika” of decision makers that also includes the European Central Bank and the European Commission - is even needed anymore.

In effect, he said it is time for Europe to handle its problems without outside help.

Commerzbank analyst Christoph Weil said European leaders are slowly waking up to what has been evident to financial markets for a long time. “The current decision structure is dysfunctional,” Weil said. “It was born in the urgency of the crisis … It needs to be overhauled.”

The 17-country eurozone has been tested by a three-year crisis over government debt, which has seen five of its members bailed out - Greece, Portugal, Ireland, Spain and Cyprus.

The “troika” arrangement to monitor the bailout process has been in place for eurozone bailouts since Greece’s debt problems began to unfold in 2010.

The setup gives a prominent role to the Washington-based IMF - though it contributes much less money to bailouts than the eurozone nations.

Some eurozone member countries insisted on having the IMF on board for its experience in handling such crises around the world. Germany - Europe’s biggest economy - also saw the fund’s presence as a crucial check against political horse-trading that could have resulted in watered-down bailout conditions.

However, the troika’s inspection teams have been criticized, with claims that the groups are not answerable to voters for their insistence on austerity measures that have plunged countries such as Greece or Portugal into deeper recessions.

“The Europeans wanted the IMF aboard for its expertise, even though many at the IMF thought that Europe is economically strong enough to solve its problems on its own,” Weil said.

“Now the Europeans feel stronger, and they realize that it would have been easier sometimes without the IMF, who insisted on radical up-front measures in Greece or Cyprus before granting aid,” he added.

This view was given a boost last week by Asmussen during a hearing at the European Parliament’s economic committee in Brussels.

“I would not change the troika system in the midst of the crisis because we have no alternative available right now, but in the longer-term future … we should return to a fully EUbased system,” he said.

The IMF recognizes that it’s up to the European Commission and the European Central Bank as to whether it has a role to play in future bailouts, fund spokesman Gerry Rice said.

“I understand from reports that Mr. Asmussen underscored that he would not advise to change the troika system right now,” he said.

In place of the IMF, Asmussen suggested the eurozone could use the body set up to manage its permanent rescue fund, the European Stability Mechanism.

However, the makeup of the ESM means that it is currently technically outside the EU’s system of institutions.

The end of the troika arrangement would come once the ESM is turned into an institution of the 27-nation European Union, he added. The ESM could then play its role as Europe’s IMF.

As well as looking at the IMF’s role in international rescues, the Eurogroup - the meeting of the eurozone’s 17 finance ministers, IMF and Central Bank - has also come under the microscope.

The Eurogroup was initially planned mostly as a forum to exchange views on economic and financial policies - but the crisis has turned it into a major decision-making body.

At the moment, it has to reach a unanimous agreement on its decisions - a daunting call when 17 ministers try to forge a deal.

The decision-making process reached its climax when the bloc fought bitterly over a $13 billion bailout for Cyprus.

In March, after marathon negotiations, the Eurogroup and Cyprus patched together a bailout agreement that shocked markets and Cypriots. Cyprus’ banks had their assets frozen, and a one-time levy on all bank deposits was imposed to help pay for the rescue - a measure that violated EU deposit insurance rules that guarantee all savers with less than $130,000 in their bank accounts. It was scrapped about 48 hours later.

Meanwhile, the ECB set a deadline for a deal after which it would cut off emergency funding for Cyprus’ banks- a move that would have plunged the country into chaos and out of the eurozone.

About a week later, the finance ministers descended again on Brussels.

The second agreement saw Cyprus’ insured depositors protected but enforced a restructuring of the country’s outsized banking sector and heavy losses for those holding deposits worth more than $130,000.

Another example of the Eurogroup’s decision-making was seen this week at a meeting to work out crucial details of the bloc’s banking union - a complex project that’s seen as vital to help stabilize the EU’s financial sector and turn the tide on its crisis - but failed to make much headway.

At the moment, they can neither agree how far-reaching the banking union ought to be nor how fast they want to move in setting it up.

Analysts maintain that an overhaul of the Eurogroup is long overdue, but it’s fraught with difficulty. A simple majority vote could mean small countries ganging up and overruling the few big ones, but a system based on economic strength would mean Germany and France would hold almost 50 percent of the voting rights.

“We’re still in the process of curing the teething troubles of the euro. Now that the acute pressure is easing, it gets more difficult again to push through sweeping reforms,” Weil said.

Information for this report was contributed by Marjorie Olster of The Associated Press.

Business, Pages 31 on 05/18/2013