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Europe wants to create its own version of the IMF for 2 key reasons

  • Detailed plans from the European Commission are expected before the year end, but the overall idea is to give the ESM more responsibilities to monitor and enforce compliance during bailout programs while continuing to disburse funds
  • It would make Europe independent from the IMF each time a euro currency country needs financial rescue
Stephen Jaffe | IMF | Getty Images

After several bailout programs, the relationship between Europe and the International Monetary Fund (IMF) could be about to change dramatically.

The euro zone is studying ways to improve the powers of the European Stability Mechanism (ESM) — a fund that helps euro zone countries that need to borrow money — and for it to ultimately replace the IMF's presence in bailouts.

Detailed plans from the European Commission are expected before the year end, but the overall idea is to give the ESM more responsibilities to monitor and enforce compliance during bailout programs while continuing to disburse funds — basically, the tasks of the IMF.

"The euro area is more resilient now than in years past … I believe the ESM should now progressively graduate into a European Monetary Fund which, however, must be firmly anchored in the European Union's rules and competences," Jean-Claude Juncker, European Commission president, told lawmakers in September.

Why does the euro zone need its own IMF?

The idea from European officials and leaders, including French President Emmanuel Macron, is to deepen the ties within the euro zone and thereby make it more resilient to financial shocks.

But, mostly, it would make Europe independent from the IMF each time a euro currency country needs financial rescue.

According to Carsten Brzeski, chief economist at ING, the euro zone wants to build up its own "fire fighter" for potential future sovereign crises.

"An EMF (European Monetary Fund) would also leave euro zone problems to be solved by the euro zone and not by 'outsiders,'" he said via email.

During the Greek crisis, there were significant policy differences between Europe and the IMF. These started in differences in forecasts — for instance, in what will be Greece's primary surplus — to ultimate key decisions, such as how further debt restructuring should work. It is worth noting that the IMF has been, in opposition to most euro zone members, one of the biggest supporters to adapting Greece's debt profile.

At the same time, an EMF could be particularly welcomed in Germany. The biggest euro economy is one of the most critical of the European Commission's work as a fiscal authority – the EU's executive arm is responsible for tracking countries' compliance with deficit and debt rules, but despite several deviations across the region, the commission has never imposed fines.

"Beneath the surface, I think there is frustration in many circles that support the EMF proposal with the political nature of the European Commission," Erik Jones, professor of European studies at John Hopkins University, told CNBA via email.

This is because the ESM could, as part of the upcoming proposals, include powers to act as a fiscal authority on the countries of the euro. Given, that the ESM is inter-governmental and seen as free from political interference, some analysts believe it could be the answer to Germany's call to see European fiscal rules applied effectively.

"They worry that the commission is likely to be unwilling to push member states hard enough when they break the rules. The EMF would be less afraid of being unpopular and so more willing to impose discipline," Jones said.