France and German officials have voiced their support for an IMF like organisation for the Eurozone. This situation is part of the normal process of surviving a crisis. First you recognise that there's a problem (which is to say that you stop being in denial, because in economic terms the problem does not build up over night, it has been there and it has created a pretty little bubble on which people were happy to feed. Once it blows, then it is this amazing black swan that no one expected.). Then you come up with a short term solution for it (you patch things up), so that you can think of a good way to try and avoid the problem repeating itself. We are now at that stage in Europe, we have taken stock of what happened and are trying to figure what can be done to solve things. Of course it is difficult to sort through the noise of German and Greek nationalistic slur.
We have a number of things on the table:First we have this idea by the ECB, that it should somehow possess a financial rating agency of its own. My understanding is that this was put forth by the Governor of the Austrian Central bank, but no one has really spoken out in favour or against it. Finance ministers are discussing it apparently...
Then we have also heard of the more serious proposal for a European System of Financial Supervisors (ESFS) within the framework of a European Macroprudential Supervisory Authority (EMSA?), , which has stirred enough interest for there to be hearings at the EP about it. This is a more official idea (details about it can be found here). It was put forth in the Larosière report drafted by a "High level group" on financial supervision, which is to say a group of credible and important MEPs. From what that article seems to describe the ESFS would be divided in three subcommittees:
The Committee of European Banking Supervisors (CEBS), The Committee of European Insurance and Occupational Pensions Committee (CEIOPS) The Committee of European Securities Regulators (CESR)Finally, there's the EMF (European Monetary Fund) proposal, which was first put forth in recent days by the German Finance Minister Wolfgang Schäuble (analysis here). As the name indicates this would be a type of insurance company for European governments. Everyone pays an yearly premium for an "insurance" and then when the getting gets tough, the fund is there to lend money to whoever has not been able to keep its expenses in check. It is there to ensure that governments who mess up their public balance are still able to pay their debts (oddly enough by contracting even more debt, but at a nice rate) and it deflects public outcry from the affected country to the European Commission rather than to Germany
I think that the first idea is not particularly good... Getting a government agency in charge of determining who is worth what sounds too much like centralised price setting, which is inefficient. Public officials lack the self interest that private agents have in their pursuit of information. Secondly public institutions are more constrained in terms of the monetary incentives it can provide (particularly if one assumes that financial crisis will still happen, and that no single system can prevent them or guarantee that their size will be limited. That would be a little PR mess...). Thirdly, it would open the doors for a greater extent of agency capture in the financial sector. Finally, there's the opposite problem of agency capture by governments, who may try to exploit their new found influence by pushing this agency to provide their debt with inappropriately high quality ratings. In other words there would be a potential for selection bias in the value that this rating agency would attribute to government assets rather than to private assets.
So to sum up: lack of self intrest and a limited set of tools to provide incentives exacerbate, or at least fail to solve, the problem of asymmetries of information
agency capture from both private and public agents seems to create fertile grounds for future conflicts of interest and revolving doors. Regarding the second idea, I think further integration is a really good idea. I agree with the author of the Eurozone entry blog, that there is little point in creating this finacial supervisory authority if the structure is going to be overly decentralised. Of course the committees should be separate, but there should be a supervisory point where all financial sectors (Banking, Insurance and Securities) are aggregated for analytical purposes. These industries cannot be regulated separately. Over decentralisation would be tantamount to coordination under a new name, rather than actual integration/delegation of powers. Regarding the problems that I raised with the EU rating agency, these are absent here. In this sense, the ESFS would outsource financial rating to the private sector (Moodys and S&P, etc). My main problem really is about its name. Why call this a European Macro prudential Supervision? It Finance, not macroeconomics... It should be overseen at the EcoFin level, but more than that I can't quite see the Macro point of the ESFS... Finally I think that the last idea is really good. Although it has faced some opposition. Here are some links for further information> Here, der spiegel and business week ft and bbc Note that I think that the EMF would not suffer from any particular problem of Moral Hazard, as it would provide an incentive mechanism based on conditionality. This is not just insurance. It's insurance "if!". So that's good! Moreover, I believe that the risk is in the rigidity of the proposed conditionality. Too rigid and its intellectually dangerous. Too flexible and its economically useless. On the other hand it could be more targetted, taking advantage of the insider knowledge that the EU already has about the functioning of its member states economies, so that conditions could be targetted at certain economic sectors, political reforms and apply in the Longer rather than in the Shorter term, when appropriate. One of the problems of the IMF interventions has always been that its interventions don't have permanent effects. The risk is that once the EMF will be set up it will repeatedly rescue the same countries. This would be problematic, as self selection would propose that those who are not at risk would simply stop contributing, and instead decide to follow policies that minimise their exposure to their neighbours malpractice. If this logic makes sense then it would imply that poorer countries policies would crowd out foreign investment from the EU. Also check this link for some insights on the present discussions about budget and tax coordination.
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