European Stability Mechanism
The European Stability Mechanism is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone Member States having ratified a special ESM intergovernmental treaty. It was established on 27 September 2012 as a permanent firewall for the eurozone, to safeguard and provide instant access to financial assistance programmes for member states of the eurozone in financial difficulty, with a maximum lending capacity of €500 billion.
It replaces two earlier temporary EU funding programmes: the European Financial Stability Facility and the European Financial Stabilisation Mechanism. All new bailouts for any eurozone member state will now be covered by ESM, while the EFSF and EFSM will continue to handle money transfers and programme monitoring for the previously approved bailout loans to Ireland, Portugal and Greece.
The Treaty Establishing the European Stability Mechanism stipulated that the organization would be established if member states representing 90% of its capital requirements ratified the founding treaty. This threshold was surpassed with Germany's completion of the ratification process on 27 September 2012, which brought the treaty into force on that date for sixteen of the seventeen members of the eurozone. The remaining state, Estonia, which had only committed 0.19% of the capital, completed its ratification on 4 October 2012. A separate treaty, amending Article 136 of the Treaty on the Functioning of the European Union to authorize the establishment of the ESM under EU law, was planned to enter into force on 1 January 2013. However, the last of the then-27 European Union member states to complete their ratification of this amendment, the Czech Republic, did not do so until 23 April 2013, postponing its entry into force until 1 May 2013.
The ESM commenced its operations after an inaugural meeting on 8 October 2012. The first 40% of the paid-in capital was transferred by all ESM member states ahead of a treaty regulated deadline of 12 October 2012. ESM member states can apply for a bailout if they are in financial difficulty or their financial sector is a stability threat in need of recapitalization. ESM bailouts are conditional on member states first signing a Memorandum of Understanding, outlining a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability. Another precondition for receiving an ESM bailout is that the member state must have ratified the European Fiscal Compact. When applying for ESM support, the country in concern is analyzed and evaluated on all relevant financial stability matters by the so-called Troika in order to decide which of its five different kinds of support programmes should be offered.
As of April 2013, the ESM has approved two Financial Assistance Facility Agreement programmes, with up to €100bn earmarked for recapitalization of Spanish Banks, and €9bn in disbursements for Cyprus for a sovereign state bailout programme. The Cyprus bank recapitalization was funded by converting bank deposits into equity.
History
Following the European sovereign debt crisis that resulted in the lending of money to EU states, there has been a drive to reform the functioning of the eurozone in the event of a crisis. This led to the creation, amongst other things, of a loan mechanism: the European Financial Stability Facility and the European Financial Stability Mechanism. These, together with the International Monetary Fund, would lend money to EU states in trouble, in the same way that the European Central Bank can lend money to European banks. However, the EFSF and EFSM were intended only as a temporary measure, in part due to the lack of a legal basis in the EU treaties.In order to resolve the issue, the German government felt a treaty amendment would be required. After the difficult ratification of the Treaty of Lisbon, many states and statesmen opposed reopening treaty amendment and the British government opposes changes affecting the United Kingdom. However, after winning the support of French President Nicolas Sarkozy Germany won support from the European Council in October 2010 for a new treaty. It would be a minimal amendment to strengthen sanctions and create a permanent lending-out mechanism. It would not fulfil the German demand to have the removal of voting rights as a sanction as that would require deeper treaty amendment. The treaty would be designed so there would be no need for referendums, providing the basis for a speedy ratification process, with the aim to have it completely ratified and come into force in July 2012. In that case, it was to co-exist with the temporary lending-out mechanism for one year, as EFSF was set only to expire as a rescue facility at 1 July 2013.
Treaty basis
Article 136 amendment of TFEU
On 16 December 2010 the European Council agreed a two line amendment to Article 136 of the Treaty on the Functioning of the European Union, that would give the ESM legal legitimacy and was designed to avoid any referendums. The amendment simply changes the EU treaties to allow for a permanent mechanism to be established. In March of the following year leaders also agreed to a separate eurozone-only treaty that would create the ESM itself.In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play 'a central role' in running the ESM, despite wishing it had been more involved earlier, and it was signed by all 27 EU member states on 25 March 2011. The amendment reads:
The amendment authorises the eurozone countries to establish a stability mechanism to protect the common currency, within EU law. This mean, that the existing intergovernmental treaty having established ESM outside of the EU framework with entry into force 27 September 2012, might subsequently be transposed to become part of the EU framework once this TFEU article 136 amendment enters into force. The ESM established by the intergovernmental treaty was designed to be fully compatible with existing EU law, and the European Court of Justice ruled in November 2012 - that "the right of a Member State to conclude and ratify the ESM Treaty is not subject to the entry into force" of the TFEU amendment. The TFEU amendment came into force on 1 May 2013, after the Czech Republic became the last member state to ratify the agreement according to its respective constitutional requirements.
In June 2015, an updated EMU reform plan was released which envisaged that in the medium-term the ESM should be transposed from being an intergovernmental agreement to become fully integrated into the EU law framework applying to all eurozone member states under the competence provided for by the amended article 136 of the TFEU.
Treaty Establishing the European Stability Mechanism
In addition to the "TFEU amendment" treaty, the European Stability Mechanism itself was established by a treaty among the eurozone states, named the Treaty Establishing the European Stability Mechanism, which sets out the details of how the ESM would operate. Formally, two treaties with this name were signed: one on 11 July 2011 and one on 2 February 2012, after the first turned out not to be substantial enough the second version was produced to "make it more effective". The 2012 version was signed by all 17 Eurozone members on 2 February 2012, and was planned to be ratified and enter force by mid-2012, when the EFSF and EFSM were set to expire. The treaty was concluded exclusively by eurozone states, amongst others because the UK refused to participate in any fiscal integration.The Treaty establishing the ESM entered into force on 27 September 2012 for 16 signatories. Estonia completed their ratification on 3 October 2012, six days after the treaty entered into force. However, the inaugural meeting of the ESM didn't occur until 8 October, after the treaty's entry into force for Estonia. Latvia's adoption of the euro on 1 January 2014 was given final approval by the Economic and Financial Affairs Council on 9 July, making them eligible to apply for ESM membership. Following Latvia's government giving their consent to joining to the ESM in November 2013, the acceded on 21 February 2014. The treaty entered into force for them on 13 March 2014. Latvia's contribution to the ESM will be €325 million. Lithuania adopted the euro on 1 January 2015, and acceded to the ESM on 14 January 2015. They became a member on 3 February 2015.
Organization
The ESM is an intergovernmental organization established under public international law, and located in Luxembourg City. It has about 145 personnel, who are also responsible for the EFSF. The organization is led by a managing director appointed for a 5-year term. The first managing director Klaus Regling was appointed in 2012.Each member state appoints a governor for the board of governors, which can either be chaired by the President of the Euro Group or by a separate elected chair from amongst the governors themselves. In 2012, Jean-Claude Juncker was appointed to this position. The board consists of Ministers of Finance of the member states. The Board of Directors consists of 19 members "of high competence in economic and financial matters". Each member state appoints one Director and an alternate.
Financial support instruments
ESM member states can apply for an ESM bailout if they are in financial difficulty or their financial sector is a stability threat in need of recapitalization. ESM bailouts are conditional on member states first signing a Memorandum of Understanding, outlining a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability. Another precondition for receiving an ESM bailout, starting from 1 March 2013, will be that the member state must have fully ratified the European Fiscal Compact. When applying for ESM support, the country in concern will be analyzed and evaluated on all relevant financial stability matters by the so-called Troika in order to decide if one/several of these 5 different kind of support programmes should be offered:- Stability support loan within a macro-economic adjustment programme :
- Bank recapitalisation programme:
- Precautionary financial assistance :
- Primary Market Support Facility :
- Secondary Market Support Facility :
In order to further help increase the financial stability of the eurozone, the ECB decided on 6 September 2012 to automatically run a free unlimited amount of yield-lowering bond purchases for all eurozone countries involved in a sovereign state bailout or precautionary programme from EFSF/ESM, if -and for as long as- the country is found to suffer from stressed bond yields at excessive levels; but only at the point of time where the country possesses/regain a complete market funding access -and only if the country still complies with all terms in the signed MoU-agreement. Countries receiving a precautionary programme rather than a sovereign bailout, will per definition have complete market access and thus qualify for OMT support if also suffering from stressed interest rates on its government bonds. In regards to countries receiving a sovereign bailout, they will on the other hand not qualify for OMT support before they have regained complete market access, which the ECB define as the moment when the state succeeds to issue a new ten-year government bond series at the private capital market.
Initially, EFSF and ESM were only allowed to offer financial stability loans directly to sovereign states, meaning that offered bank recapitalisation packages were first paid to the state and then transferred to the suffering financial sector; and thus these type of loans were accounted for as national debt of the sovereign state - adversely impacting its gross debt-to-GDP ratio and credit rating. For example, this regime was utilized when ESM established a bank recapitalization support programme for Spain in 2012–13.
On the EU summit on 19 October 2012, it was decided that ESM bank recapitalisation packages in the future, instead only shall by paid directly to the financial sector, so that it no longer counts as state debt in the statistics. ESM made the decided "direct bank recapitalization" framework operational starting from December 2014, as a new novel ultimate backstop instrument to apply for systemic banks in their recovery/resolution phase, if such banks will be found in need to receive additional recapitalization funds after conducted bail-in by private creditors and regulated payment by the Single Resolution Fund. In this way, the primary backstop to patch future uncovered recapitalization needs of a failing systemic bank will be provided by bail-in of private creditors along with contributions from the Single Resolution Fund, while the ESM "direct bank recapitalization" instrument only will be needed as an "ultimate backstop" for the most extreme cases where the primary backstop funds are found to be insufficient.
Contributions
The ESM is expected to have an authorised capital of 700 billion euros of which 80 billion is paid-in capital, and the remaining 620 billion, if needed, will be loaned through the issuance of some special ESM obligations at the capital markets. The ESM treaty foresees a payment of the capital in five annual instalments, but the Eurogroup decided on 30 March 2012 that capital payments shall be accelerated and all the capital paid by the first half of 2014. The following table shows the part each member state has to pay following the ESM treaty.| ESM member state | Percentage of contributions | Paid-in capital | Number of shares | Capital subscription | Nominal GDP 2010 |
| Germany | 27.1464 | 21,717.1 | 1,900,248 | 190,024.8 | 3,315,643 |
| France | 20.3859 | 16,308.7 | 1,427,013 | 142,701.3 | 2,582,527 |
| Italy | 17.9137 | 14,331.0 | 1,253,959 | 125,395.9 | 2,055,114 |
| Spain | 11.9037 | 9,523.0 | 833,259 | 83,325.9 | 1,409,946 |
| Netherlands | 5.7170 | 4,573.6 | 400,190 | 40,019.0 | 783,293 |
| Belgium | 3.4771 | 2,781.7 | 243,397 | 24,339.7 | 465,676 |
| Greece | 2.8167 | 2,253.4 | 197,169 | 19,716.9 | 305,415 |
| Austria | 2.7834 | 2,226.7 | 194,838 | 19,483.8 | 376,841 |
| Portugal | 2.5092 | 2,007.4 | 175,644 | 17,564.4 | 229,336 |
| Finland | 1.7974 | 1,437.9 | 125,818 | 12,581.8 | 239,232 |
| Ireland | 1.5922 | 1,273.8 | 111,454 | 11,145.4 | 204,261 |
| Slovakia | 0.8240 | 659.2 | 57,680 | 5,768.0 | 86,262 |
| Slovenia | 0.4276 | 342.1 | 29,932 | 2,993.2 | 46,442 |
| Luxembourg | 0.2504 | 200.3 | 17,528 | 1,752.8 | 52,433 |
| Cyprus | 0.1962 | 157.0 | 13,734 | 1,373.4 | 22,752 |
| Estonia | 0.1860 | 148.8 | 13,020 | 1,302.0 | 19,220 |
| Malta | 0.0731 | 58.5 | 5,117 | 511.7 | 7,801 |
| Total | 100.0 | 80,000 | 7,000,000 | 700,000 | 12,202,194 |
At the moment when ESM has received all its paid-in capital from the eurozone countries, the ESM will be authorized to approve bailout deals for a maximum amount of €500 billion, with the remaining €200 billion of the fund being earmarked as safely invested capital reserve, in order to guarantee the issuance of ESM bonds will always get the highest AAA credit rating, with the lowest possible interest rate at the current time. 40% of the paid-in capital shall be transferred on 12 October 2012, with the remaining three times of 20% transfers scheduled for Q2-2013, Q4-2013 and Q2-2014. As the ESM lending capacity depends on the amount of paid-in capital, it will start out only to be €200bn in Q4-2012, and then be increased with €100bn each time one of the remaining three capital transfers ticks in. If needed, a majority of the ESM board can also decide to accelerate the payment schedule. On 1 May 2013, ESM has reconfirmed the schedule for receiving paid-in capital, with the third tranch already received in April 2013 followed by the fourth in October 2013, with the final fifth tranch scheduled for April 2014.
Lending activities
The Troika currently negotiates with Spain and Cyprus, about setting up an economic recovery programme in return of providing support with financial loans from ESM. Cyprus so far applied both for a €6bn sovereign bailout loan and a €5bn bank recapitalisation package. Cyprus could however perhaps also be interested in additional support packages from instrument 3/4/5. Reportedly Spain beside of applying for a €100bn bank recapitalisation package in June 2012, now also follow a path of negotiations to get financial support from a Precautionary Conditioned Credit Line package. If Spain will apply and receive a PCCL package, irrespectively to what extent it subsequently decides to draw on this established credit line, this would at the same time immediately qualify the country also to receive "free" additional financial support from ECB, in the form of some yield-lowering bond purchases.Bailout programmes for EU members since 2008
Critics
Critics have noted that the ESM severely confines the economic sovereignty of its member states and criticise that it provides extensive powers and immunity to the board of ESM Governors without parliamentary influence or control. Think-tanks such as the World Pensions Council have argued that the European Stability Mechanism is the product of a short-term political consensus, and thus won't be conductive of a durable, cohesive institutional solution. In their perspective, a profound revision of the Lisbon Treaty itself is unavoidable if Germany is to succeed in imposing its economic views, as stringent orthodoxy across the budgetary, fiscal and regulatory fronts will necessarily have to go beyond the treaty in its current form, thus further reducing the individual prerogatives of national governments.;Estonia
In Estonia a group of MPs have called for a referendum on the treaty. On 8 August, during the first reading of the bill ratifying the ESM in Riigikogu, the Estonian Centre Party put forward a motion to reject the bill. However, this motion was defeated in parliament by 56 votes against, with 33 voting for.
;Germany
In Germany some members of FDP and CSU, both minor parties of the previous government coalition, were against the European Stability Mechanism. The Left, Pirate Party Germany and NPD also oppose the ESM, the latter comparing it with the Enabling Act of 1933.
;Finland
Both opposition parties the Finns Party and the Centre Party oppose the ESM.
;France
Left Front and left wing presidential candidate Jean-Luc Mélenchon oppose the ESM.
;Netherlands
The Socialist Party opposes the ESM. Geert Wilders' Party for Freedom opposes any increase or systematisation of transfer payments, from the Netherlands to other EU countries, through means such as the ESM.
;Slovakia
An opposition liberal party Freedom and Solidarity is a staunch opponent of the ESM.