Bruegel: The time is right for a European Monetary Fund

30 October 2017

The third of the banking union’s pillars, common European deposit insurance, is still missing. The authors propose to design the EMF as part of a broader risk-sharing and market-discipline agenda.

The re-election of Chancellor Merkel and the election of President Macron create a new momentum for strengthening the euro area’s crisis framework. There is agreement to turn the ESM into a European Monetary Fund (EMF). Authors propose to design this EMF as part of a broader risk-sharing and market-discipline agenda. Risk sharing would come from the increased capacity of the EMF to intervene early in a sovereign or banking crisis and to act as a fiscal backstop to a complete banking union that includes European deposit insurance. Market discipline of sovereigns would come from the reduced exposure of banks to their home sovereigns and from a newly-established debt restructuring mechanism. The proposed transformation of the ESM into an EMF should be viewed as part of a wider institutional reform of the fiscal dimension of the euro area.

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