IMF chief calls for centralised fiscal control of euro zone

 

THE HEAD of the International Monetary Fund (IMF), Dominique Strauss-Kahn, has called for the creation of a fiscal federation in the euro zone which would have much greater control over tax and spending issues in member states.

Speaking at a conference in Brussels, Mr Strauss-Kahn, a leading figure in France’s opposition Socialist Party, said “a more integrated and centralised fiscal framework could deliver higher and more stable growth for Europe” . He warned that without “fiscal federalism”, Europe’s single currency may not survive.

Mr Strauss-Kahn said the euro zone had ceilings on budget deficit and public debt, and a “speed camera system” in the European Commission. Although there is no court to try offenders in, he accepted that the large bailout fund, put in place in May by Europe and the IMF to respond to the Greek budgetary crisis, was a temporary form of emergency assistance.

He proposed greater powers for the European Commission to police national economic policies or a separate, independent European institution, along the lines of the European Central Bank (ECB).

He also advocated a larger EU-level budget. Citing the US and Canadian federal systems, he said that when one state suffered an economic shock, such a budget can be used to channel resources to the affected state, helping make the adjustment easier. This is needed in the euro zone, he said.

He suggested an expanded EU budget could be financed by the introduction of a “European VAT, or by carbon taxation and pricing”.

Mr Strauss-Kahn, who was France’s finance minister from 1997-1999, unsuccessfully sought the French Socialist Party’s candidature for the presidency at the last election, held in 2007, and is widely expected to seek it again.

The next contest will be in 2012, but primaries start as early as next year. His comments on Europe are often interpreted as an attempt to maintain his profile in France with a view to challenging for the presidency.

Separately it emerged that the ECB may have bought less than 10 per cent of Irish government bonds traded last week, according to Glas Securities, which specialises in fixed-income markets.

“Turnover in Irish government bonds last week was circa €2.6 billion, which would lead us to conclude that the ECB participation was no more than single-digit percentage of the total market turnover,” the Dublin-based firm said in a note to clients.

The National Treasury Management Agency said it will auction two sets of bonds next Tuesday, September 21st, as part of its regular funding programme.

A 4.0 per cent treasury bond with a maturity date of January 15th, 2014 will be auctioned, as well as a 4.5 per cent bond with a maturity date of October 18th, 2018.

The auction size will be announced on Friday morning.

On markets yesterday, the spread between Irish government bonds and the German bund, Europe’s benchmark security, hit its lowest level since ratings agency Standard & Poors downgraded Ireland’s credit rating on August 24th last.

Germany’s 10-year bund advanced after a report showed German investor confidence fell more than expected in September. – (Additional reporting, Bloomberg)