IMF Urges Eurozone to Set Up a Joint Budget to Avoid Economic Shocks

According to a report released yesterday by IMF, Eurozone should set up a joint budget to help avoid economic shocks and to prevent weak members (from Ireland to Cyprus) from experiencing severe recessions.

 

The report notes that the joint budget could be worth up to 2.5 percent of the bloc’s output of about 10 trillion euros ($13 trillion), or about 200 billion euros. However, to make this plan viable, Europeans should agree to give up national sovereignty by affecting more money and power to joint institution.

 

It’s clear that the report’s proposals go far beyond what is currently envisioned in Europe and would face political and legal hurdles. Indeed, stronger economies, especially Germany, are likely to reject them as an introduction through the backdoor of permanent transfer payments to financially weaker countries. The concern remains that countries benefiting from the payments would be less willing to make unpopular reforms.

 

Some extracts from IMF report:

 

“Addressing gaps in EMU architecture could help prevent crises of such magnitude in the future, while supporting current crisis resolution efforts.”
 
“Such a fund would collect revenues from euro area members at all times and make transfers to countries when they experience negative shocks”
 
“Yet, political backing for a clear roadmap remains elusive, with views on the contours of a fiscal union differing widely among euro area members”