Cause and Effect in European Politics and Law

European Parliament backed the creation of ESM

Ralitsa Kovacheva, Adelina Marini, March 24, 2011

On the eve of the European Council in Brussels the MEPs backed EU treaty changes needed to allow for the establishment of a permanent rescue fund for the euro area – the European Stability Mechanism (ESM).

As it was agreed by the EU leaders on their meeting in December 2010, in Article 136 of the Treaty on the Functioning of the European Union (TFEU) will be inserted the following paragraph: “The Member States whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.”

The MEPs, however, insist the national governments and not the EU institutions to have the leading role in the establishment, management and accounting of the new financial instrument. Along these lines moved the report by MEPs Elmar Brok (EPP) and Roberto Gualtieri (S&D) who led the interinstitutional negotiations aimed to agree on the application of the EU method, instead of the intergovernmental mechanisms when deciding on this important monetary matter. "In the last few days our objectives have been achieved", said Elmar Brok adding "we made a contribution to ensure the Commission is involved".

The Parliament believes that it is important to involve the new Member States in the process in order to prevent a division of Europe into two speeds. The Mechanism provides for participation of the countries outside the euro area at any moment in case they wish to join.

Many of the new EU Member States have set themselves the task to adopt the euro and therefore their voice has to be heard even from now, at the moment when decisions are taken”, commented Iliyana Ivanova, an EPP MEP, who is a Member of the Economic and Monetary Affairs Committee and a Deputy Chair of the special Committee of the Financial, Economic and Social Crisis.

ALDE leader and former Belgian PM Guy Verhofstadt, though, was reserved about the agreement. According to him, the very functioning of the ESM could prove to be problematic. “Every time that money is to be released, every Member State's Parliament will have to give their green light. Notwithstanding the slowness of the procedure, it is very risky and will mean that any bailout for a country will be contingent on the internal politics of another country", Mr Verhofstadt commented.

It is expected EU heads of state to finally endorse the ESM proposal at their meeting this week so that the national procedures for ratification of the Treaty changes could start. The target date for the Stability Mechanism's entry into force is 1 January 2013 when it will replace the temporary rescue fund ESFS. The ESM will be able to provide loans to troubled euro zone countries and to buy up debt on primary markets under strict conditions as it is with current loans for Greece and Ireland. One of the key requirements of the new mechanism will be the sharing of risk with private creditors.

To this end “standardised and identical collective action clauses (CACs) will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro area government bonds starting in June 2013.” The clause should serve as a legal basis for a change of the payment conditions (standstill, extension of the maturity, interest cut and/or haircut) in case the debtor is unable to pay off.

The Financial Times quoted analysts saying that in practice this means recognition of the chance a country from the euro area to go bankrupt. Investors threaten to boycott the debt bonds of Eurogroup countries, the newspaper notes, because they fear losses. Moreover, at the end of 2010 it was decided that “in order to protect taxpayers’ money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan.”

EU leaders have to take the final decision for the establishment of the Mechanism in parallel to other important decisions – for instance, if the conditions for Ireland's loan will be altered in case that the country agrees to discuss an increase of its corporate tax. It is expected Portugal too to be part of the agenda because of the forecasts that the political crisis in the country will speed-up its asking for assistance from EU and IMF.

The vote on these important changes in the basic EU legislative act took place in an overcrowded plenary hall. The treaty change was backed by 494 MEPs, 100 voted against, 9 abstained.