European Monetary Fund is no silver bullet

The European Commission’s (EC) latest proposals for euro-zone reform and integration centred on the transformation of the European Stability Mechanism into a European Monetary Fund (EMF). The EC plans to give the EMF a wider remit, with it acting as a backstop to the region’s banking sector, having more say in financial assistance programmes and potentially funding a future fiscal “stabilisation mechanism”. But while it seems sensible that the EMF acts as a fiscal backstop to the banks, it is not clear that the EMF would be an improvement to the region’s sovereign crisis-management tools. In particular, asking it to fund fiscal stabilisation loans as well as bailouts will stretch its lending capabilities and could therefore run into substantial opposition from national governments.