THE INTERNATIONAL Monetary Fund has made its strongest call yet for Europe to strengthen euro-zone economic governance to the deal with its debt crisis.
In a series of reports on the euro-zone economy released yesterday, the IMF made a number of recommendations that it believes must be implemented to “restore confidence in the European project”.
While the fund maintained its view that the recovery in the euro-zone economy as a whole was solid, the risk posed by the sovereign debt crisis was large, it said.
An IMF official spoke yesterday of “an earthquake-type event” if the risks facing the euro zone were to materialise.
In the near term, the fund made three recommendations.
First, the bailout fund established last year (known as the European Financial Stability Facility) should be scaled up and made more flexible.
Second, clarity is required on the role of private-sector burden sharing. In this regard, an official yesterday mentioned not only sovereign debt but also “senior secured” bank debt. The latter is more relevant to Ireland than any other country given that its banking losses are the largest among the zone’s 17 national economies and its banking system is most dependent on official support.
Thirdly, the IMF said euro-zone banks “urgently need more and better-quality capital”.
Over the medium term, the IMF said the “subordination of some fiscal sovereignty [was] unavoidable for the common good”, adding that budgetary rules in the euro zone needed to be made binding.
An IMF official said that a “full fiscal federation” was not necessary to achieve a sustainable euro zone. There was “no proof that the euro area is not viable without a federalist fiscal architecture”, one of yesterday’s reports stated.
Of specific relevance to Ireland’s banks, the fund urged consideration of a facility to replace short-term liquidity support provided by central banks. Ireland has sought such a facility on a number of occasions since the banking crisis became chronic but it has not been forthcoming from either the ECB or the stability facility.
Less welcome in Ireland will be a recommendation to have a common tax for companies, with the IMF suggesting “harmonising regulation and taxation and working towards the introduction of a common corporate tax for large firms”.
