International Monetary Fund (IMF) head Christine Lagarde said on Monday euro zone leaders should set up a “rainy day fund” to help cushion member states in economic downturns.
Officials in the bloc have been discussing such a fund since last year as one option for setting up a euro zone budget or boosting fiscal capacity — an idea championed by France and to which opposition from Germany appears to be softening.
In a speech in Berlin, the Fund’s managing director welcomed a “sustained and broadly shared upswing” in the global economy, which she said offered a precious window of opportunity for governments to “complete the architecture” of the euro zone.
“There are other, forceful headwinds threatening,” Ms Lagarde said. “Think of the rise of populism and the short-sighted siren call of protectionism.”
Talks among euro zone finance ministers on an additional fiscal capacity have so far brought no conclusions, partly because Germany was long without a government following an inconclusive election in September. Leaders are likely in June to give direction to further work.
Chancellor Angela Merkel’s conservatives and the centre-left Social Democrats offered some encouragement to that process in the coalition deal they sealed last month, agreeing to support devoting specific budget funds to economic stabilization, social convergence and structural reform in euro zone.
Those funds – developed from the euro zone’s existing ESM bailout fund – should form the basis for a future bloc-wide “investment budget”, the parties said.
Ms Lagarde said the initial decision to get to work on building a rainy day fund could come quickly.
“Within the next six months or so there could be a meeting of minds … on the general principles and timeline,” she said. Even if details took five years to hammer out, the announcement would “let it be public that members of the currency union stick together”.
For the euro zone to prepare for the next downturn, she urged members to develop a modernised capital markets union, an improved banking union and to move towards greater fiscal integration – starting with a central fiscal capacity that would reassure investors.
Euro zone countries would contribute to the rainy day fund each year, building up assets in good times that they could then tap during a downturn.
In extreme circumstances, countries could borrow from the fund and repay loans with future contributions, she said. Transfers should be conditional on members sticking to EU fiscal rules.
Ms Lagarde recommended that countries pay a premium in good times based on the benefits they receive in bad times, incentivising members to streamline their economies and maintain fiscal discipline.
These twin steps would aim to avoid permanent transfers, also a priority of euro zone officials’ own fund proposals.
EU officials are also considering an unemployment re-insurance scheme, a fund to support investment during economic downturns and money to support structural reforms that help euro zone economies converge.
On a capital markets union, she called for enhanced regulation and upgraded oversight arrangements to handle a likely influx of financial services firms to continental Europe after Brexit.
Ms Lagarde welcomed signs of progress on a banking union.