All You Need to Know About ESM

All You Need to Know About ESM

ESM: European stability mechanism

European Stability Mechanism, abbreviated as ESM by abbreviationfinder, is a set of instruments intended to guarantee the stability of the European Economic and Monetary Union as a whole.

The first version of the “Treaty establishing the European Stability Mechanism” was signed by the 17 member states of the Eurozone on July 11, 2011 and a modified version on February 2, 2012. The ESM replaced the euro rescue package that was set up for a limited period in May 2010. – In 2018 it belonged to 19 EU member states.

Temporary rescue package: The euro rescue package was set up in May 2010 with the aim of averting the impending insolvency of Greece and thus cushioning the effects of a failure of this member state (pan-European bank rescue operations after full suspension of payments) on the euro zone. The rescue parachute as it was on 9/10 5. was adopted in 2010, comprises a guarantee volume of € 750 billion and is composed as follows:

  • The European Financial Stabilization Mechanism (abbreviation EFSM), established as a community instrument of the EU, provides € 60 billion from the EU budget. It is no longer applicable when the ESM comes into force at the latest.
  • The European Financial Stability Facility (abbreviation EFSF), set up as an intergovernmental instrument, contributes € 440 billion to the guaranteed volume of the rescue package. The EFSF founded as a special purpose vehicle (seat: Luxembourg) can grant the country concerned loans at significantly lower interest rates than the indebted country would have to pay on the free capital market. The EFSF refinances these loans on the capital market, for which all member states of the euro zone must be liable in accordance with their capital stake in the ECB. A prerequisite for the granting of loans is that the state concerned accepts a financial and economic recovery program aimed at restoring financial stability.
  • The IMF provides up to € 250 billion.

At summit meetings in March and July 2011, the heads of state and government of the euro zone decided to modify the EFSF: The guarantee framework of the euro countries was increased so that they can obtain the total amount of € 440 billion as cheaply as possible (AAA rating) on ​​the capital market € 780 billion increased. After this expansion, Germany will have to provide guarantees in the amount of € 211 billion. In addition, the competencies for the EFSF (and its successor, the ESM) have been expanded: Under certain conditions there is the possibility to intervene in the primary market for government bonds and to buy up old government debt on the secondary markets. Furthermore, a member state can, as it were, receive loans »preventively«, ie before the (imminent) occurrence of insolvency. Both instruments presuppose the existence or Adoption of austerity and reform programs in the affected states. Finally, states can obtain loans to recapitalize their financial institutions. This also applies to countries that are stable, but whose banks are threatened by the high debt of another country in the euro zone.

The Bundestag approved these extensions on September 29, 2011 after a controversial debate. 523 MPs voted for the bill, 85 voted no and 3 abstained. Constitutional complaints, including The Federal Constitutional Court had already dismissed the question of the extent to which the euro rescue package contradicts national or European law in its judgment of September 7, 2011. At the same time, however, the court obliged the federal government to obtain the approval of the Bundestag’s budget committee before every step in future rescue measures.

Another summit in October 2011 decided, among other things, to use a so-called credit lever to optimize the EFSF’s resources so that it is expected to have 1 trillion euros at its disposal.

Permanent protection and emergency aid mechanism: As the debt crisis in the euro zone continued, the European Council decided in December 2010 to set up a permanent institutional protection and emergency aid mechanism and to expand Article 136 TFEU as follows: »The member states whose currency is the euro can set up a stability mechanism, which is activated when it is absolutely necessary to preserve the stability of the euro area as a whole. The granting of all necessary financial assistance within the framework of the mechanism will be subject to strict conditions. «This treaty change does not affect the no-bail-out clause (non-bailout clause), but it does allow support if the stability of the euro area as a whole is jeopardized. All members of the Eurozone belong to the ESM (Articles 1 and 2 of the Treaty establishing the European Stability Mechanism), and its seat is in Luxembourg (Article 31, Paragraph 1). Voting members of the Board of Governors, which also has to decide on the granting of loans, are the members of the national governments of the member states responsible for finances (Article 5, paragraph 1). The member of the European Commission responsible for economic and monetary affairs, the President of the ECB and the President of the Eurogroup, provided that he is not a voting member of the Board of Governors, may also attend its meetings (Article 5, Paragraph 3). Decisions on financial aid from the ESM do not necessarily require unanimity; under certain circumstances, according to Article 4, it is sufficient Paragraph 4, a qualified majority of 85% of the votes cast (since the voting rights are based on the contribution to the share capital, Germany, France and Italy, which each hold more than 15% of the ESM shares, retain a right of veto). With regard to the capital structure, the ESM draws from three sources:

  • € 80 billion are direct deposits made by the member states of the euro area.
  • The member states guarantee a total financial volume of € 620 billion, of which a maximum of € 420 billion will be disbursed as loans. The difference in the guaranteed amount is aimed at ensuring that ESM bonds receive a very good creditworthiness (AAA rating) on ​​the capital markets and that a lower interest rate is paid for them.
  • The IMF continues to participate with a loan amount of € 250 billion.

The instruments available to the ESM are similar to those of the EFSF (in addition to lending, precautionary credit lines, recapitalization of financial institutions and primary and secondary market interventions).

A member state can only receive support from the ESM if it is indispensable for the stability of the euro area as a whole. Generally it is granted in the form of loans. The board of directors must unanimously decide to grant the loan; it must be preceded by a debt sustainability analysis. The support is linked to strict requirements for the restructuring of public finances.

In principle, the member states of the euro zone are also involved in the financing of the ESM in accordance with their capital share in the ECB. According to the contribution key, the German share is 27.1464%; in terms of ESM capital to be paid in, this amounts to € 21.72 billion; Germany must provide guarantees of € 168.3 billion in terms of callable capital.

Fiscal pact and further stabilization measures: At an EU summit in December 2011, the heads of state and government of the EU member states, with the exception of Great Britain, agreed to embark on the path to a fiscal policy union (Stability and Growth Pact). With the “Treaty on Stability, Coordination and Governance in Economic and Monetary Union” (“Fiscal Treaty” for short, also “Fiscal Compact”), which all EU member states with the exception of Great Britain and the Czech Republic signed on March 2, 2012, In essence, the contracting states undertake to implement debt brakes (the structurally conditioned, cyclical new debt must not exceed 0.5% of GDP) in national law with strong binding force (preferably at constitutional level) and accept automatic sanctions if the new rules on budget discipline are not observed (the automatism can only be stopped by an express majority vote of the contracting states). The Fiscal Compact came into force on January 1, 2013.

ESM European Stability Mechanism