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Lacking the policy instruments to deal with Greece and other economic crises, some in Europe have floated the idea of a European Monetary Fund (EMF) as an institutionalized "European solution" to such situations. However, any new EU or—more likely—eurozone institution faces some formidable political obstacles, which rule out an EMF as a short-term solution to the emergencies that may arise when the Greek refinancing requirements peak in April and May.
The Lisbon Treaty's explicit ban on bailouts for any member state makes it exceedingly complicated to implement any timely financial aid for Greece. Beyond that fact are other questions. First is the issue of how such a fund would be funded.
It would have to carry substantial financial firepower to be a credible solution to any sovereign debt crisis in the eurozone, likely in the range of at least €100 billion. The risks of moral hazard in such an organization are great—i.e., the situation where austere EU members with sustainable long-term finances end up paying for crisis-prone countries lacking the political will to restore their own fiscal sustainability, as has been the case with Greece.
At the same time, it will hardly be financially possible to raise sufficient financial resources solely through a "sinners' levy" on high deficit/debt stock countries, as has been proposed by Gros and Mayer in 2010. And even if you could do it that way, the "sinful contributing countries" would likely then demand to control how and when "their money" was disbursed from an EMF. Conflicts over such matters would not be a scenario for a stable institution.
An EMF, to be credible, must therefore be funded and governed by all eurozone members. But since all member states are facing serious budget deficits, each would in some shape or form ultimately have to raise additional government revenue to participate in an EMF. Considering how incredibly unpopular any talk of bailing out Greece has been among European publics, it is hardly surprising that no European politician has proposed raising taxes to fund an EMF.
The second daunting political obstacle facing an EMF is the almost inevitable requirement to amend the Lisbon Treaty to establish such an organization in a credible way. Considering the almost 10 years and multiple referenda in several member states it took to finally implement the Lisbon Treaty in December 2009, a required change in the treaty is akin to the "third rail" of European politics—something aspirational and worth doing only in the long term. It would be hard to imagine a worse platform to get approved by a referendum than changing the Lisbon Treaty in order to set up a new EMF to bail out errant countries like Greece.
The solution to the problem may lie in the shadow of the Greek drama, where the European Commission recently announced another potentially far-reaching policy proposal, namely a harmonized EU-wide CO2 tax. This proposal raises tantalizing perspectives not only for EU climate change policy, but potentially also for the EMF.
Traditionally, tax policy has resided solely with national governments, who have strenuously resisted yielding these types of "ultimate state sovereignty powers" to the European Union. But consider these points: (1) essentially all European nations—not least the United Kingdom, which is usually most skeptical to tax harmonization—must find additional sources of government revenues in the very near future; and (2) implementing a carbon tax is far more sensible at the EU level than at the national levels as it eliminates any intra-EU competitive distortions. As a result, in the current economic climate an EU-wide CO2 tax may well be implemented very shortly.1
Armed with such a new source of government revenue in the form of a harmonized EU-wide carbon tax, but still concerned about the need for a new policy instrument to deal with Greece-like crises, member states of the eurozone ought to therefore earmark the proceeds from this tax to funding a new EMF. An added benefit here is the fact that a carbon tax would reduce emissions as pledged in Copenhagen and other climate change forums. This has the advantage of not affecting non-eurozone members and, considering how generally popular fighting climate change is in Europe, it may potentially even constitute a political platform with which to win referenda on changing the Lisbon Treaty.
The political advantage of linking an EMF and an EU-wide carbon tax will come from instituting the principle that in European bailouts, it is the polluter that pays.
1. Sweden, Finland, and Denmark have had national CO2 taxation in place since the early 1990s.
