With Greece on the brink of bankruptcy and Portugal in a bind, Germany has joined France in calling for a new system to rescue indebted nations in the euro zone - a European Monetary Fund, or EMF.

But neither Germany nor France nor any of other members in the euro zone have agreed on who should contribute to such a scheme and how much they should pay.

Responding to growing pressure to find a fix for Greece, German Finance Minister Wolfgang Schaeuble has thrown his support behind the idea of creating a sweeping new initiative that would have similar powers to those of the International Monetary Fund, known by its acronym IMF, but would not compete with the Washington-based organization.

In an interview published on Sunday in the Welt am Sonntag weekly newspaper, Schaeuble said the euro zone countries should solve their problems through their own efforts and that he would "present proposals soon" for a new institution.

'Need to look ahead and get started now'

But could such a fund save Greece from defaulting on its debt? At this point, policy experts say, it would take too long to create such a fund, but they urge governments to get the ball rolling, nevertheless.

"The euro countries need to look ahead and get started now," according to Cinzia Alcidi, a research fellow with the Centre for European Policy Studies. "Portugal's situation isn't very different from Greece's, and there are other countries with problems."

Rescue efforts, however, are complicated by European Union treaties that prevent existing EU institutions from bailing out a struggling country outright. Alcidi maintains that a monetary fund for euro countries is the answer and that German support for it is absolutely essential.

"Germany will have the first and last word," she said. "If it says the idea is feasible, the other euro zone nations will follow. That's our impression."

The financial community appears receptive to a new regional financing mechanism, even though plenty of questions remain unanswered.

"I think the EMF is a very good idea and I've been calling for it for some time," said Carsten Brzeski, senior economist at the ING Group. "But a key question is who is going to pay for it."

One option, according to Brzeski, is to have all euro countries contribute an amount to a fund based on a percentage of their Gross National Production. The problem with that option, he said, is that Germany, with Europe's largest economy, would be the largest contributor. "So that idea would certainly be a hard sale to German taxpayers," he said.

Discourage governments from running up excessive debt

Another option, said Brzeski, is to have the offenders pay a percentage of their GNP, say, 0.1 percent according to benchmark criteria. If necessary, they could then give investors new debt backed by the EMF in place of the old bonds.

Brzeski's suggestion for a fund is similar to one put forward by the Centre for European Policy Studies. Under the center's proposal, governments would pay into the fund based on how much their budget deficits exceeded the annual ceiling of 3 percent of Gross Domestic Production (GDP) and how much their total government debt exceeded the 60 percent GDP limit. The payments, the center argues, would discourage governments from running up excessive debt and deficits.

Problems in the euro zone have been simmering for some time, according to Brzeski. "Now we have a crisis and need to act," he said, arguing in favor of creating the EMF.

Author: John Blau
Editor: Rob Turner