Experts brand proposed EMF 'a distracting sideshow'

Talk of a European version of the International Monetary Fund to rescue errant EU states is little more than a distracting sideshow, according to analysts and a key central banker.

Rather than creating new institutions, the European Union should make the present framework of its currency union more credible, German central bank chief Axel Weber said.

"Any other discussion is a sideshow which will distract from the necessary (fiscal) consolidation," Weber told the central bank's annual press conference.

UniCredit chief economist Marco Annunziata was equally sceptical about the idea of a European Monetary Fund.

"An EMF would be nothing else than an admission of failure, an explicit recognition that not only the EU Stability and Growth Pact cannot enforce fiscal discipline, but also that the eurozone would be unable to design any new mechanism able to enforce fiscal discipline," he told AFP.

As the global economic slump deepened in 2008, Brussels temporarily eased fiscal rules to allow governments to spend more on support for their struggling economies.

The result was swollen public deficits, increased debt and countries including Greece in such dire straits that financial markets turned on them. That in turn threatened the cohesion and credibility of the entire eurozone.

Sound national finances - a public deficit of less than three per cent of gross domestic product and debt of less than 60 per cent of GDP - were set as the bedrock of the European project.

The current pact for curbing annual deficits and compounded debt levels for EU countries is widely seen as a failure: 20 out of 27 members have breached the deficit limits.

In Germany, Europe's biggest economy and a staunch defender of fiscal rectitude, leading politicians have floated the idea of an EMF.

Finance Minister Wolfgang Schaeuble raised the idea of a new body in comments to German Sunday newspaper Welt am Sonntag.

Germany has consistently refused to give aid to Greece for fear of sending the wrong signal and encouraging laxity elsewhere.

Royal Bank of Scotland senior European economist Nick Matthews said the European Monetary Union "is at a crossroads, its sustainability will be a function of how fiscal policies are coordinated in the future".

But some analysts have forecast that tighter rules would involve intrusive oversight of countries' fiscal management and strict sanctions, two notions that have been strongly resisted in the past.

"There seems to be no other option than removing fiscal sovereignty of member countries," Matthews warned.

"The idea of an EMF should be seen in this context, i.e., as part of a set of ideas currently being discussed to reform EMU institutions," he added. (AFP