A “rainy day” fund or short-term lending could be used to counter economic shocks for individual euro zone countries in the future, the head of the bloc’s rescue fund said on Thursday.
The euro zone does not require full fiscal union, but there is room for a facility to buffer against asymmetric shocks, European Stability Mechanism (ESM) managing director Klaus Regling said.
“It can be set up in the form of a U.S.-style rainy-day fund, or a complementary unemployment insurance. Short-term ESM lending is another option,” Regling told a conference in Nicosia.
Such fiscal capacity could be combined with a more transparent system for burden-sharing with private creditors in case of a sovereign debt restructuring, he said. It should be done within a market-based framework, with stricter collective- action clauses in bond documentation.
“Automatic maturity extensions are not desirable, because they can have pro-cyclical effects. The ESM could take on the role of organising London Club-type restructurings, in a case where a country’s debt is unsustainable.”
Regling said there were proposals to develop a European Monetary Fund, noting that a consensus was growing that the International Monetary Fund would not necessarily contribute to future ESM rescues, as it had in the past.
“The ESM could take over some of that role, in conjunction with the Commission,” Regling said.
The ESM and its precursor, the European Financial Stability Facility, have helped out five European countries, including Cyprus. The island emerged from a three-year bailout in early 2016.
Fiscal performance had been “remarkable”, but attention was still needed to reduce bad loans at Cyprus banks, Regling said.
He said Brexit, the election of President Trump in the U.S. had refocused Europeans. “Public support for the euro is at its highest levels since 2004,” Regling said.
Source: Reuters (Reporting By Michele Kambas, editing by Larry King)