European Stability Mechanism Research Articles

The governance of the recovery and resilience facility. The incremental innovation of standard conditionality regime

AbstractHow can we explain the system of governance underlying the conditionality regime of the Recovery and Resilience Facility (RRF)? Two contrasting instruments were adopted by the European Union to deal with the economic impact of the COVID‐19 crisis. The initial adaptation of the intergovernmental European stability mechanism was followed by the RRF, an instrument adopted as an add‐on to the EU budget and combining both supranational delegation and intergovernmental filters. Using the lenses of historical institutionalism, and a coalition‐based explanatory framework, this article examines the impact of past institutionalization patterns on the shift towards the RRF combined model. It argues that space for supranational delegation occurred as the result of the incremental innovation of the standard Community regime at work in EU budget‐related policies.

The Administrative Tribunal of the European Stability Mechanism: ESMAT at Ten

The Administrative Tribunal of the European Stability Mechanism (ESMAT) is an international administrative tribunal hearing appeals brought by current and former staff of the European Stability Mechanism (ESM), which is an international organization. Sitting in Luxembourg, though separate to the European Union (EU) and outside the EU legal order, the Tribunal has its own Statute and Rules of Procedure to supplement the ESM Treaty. As ESMAT reaches the age of ten, and having delivered its first judgments, this articles probes ESMAT’s legal design and rulings to-date to determine the credibility of the international administrative tribunal in providing redress, as an internal justice regime in a standalone international organization. It finds that despite the preadolescent age of ESMAT, it is a well-designed international tribunal, established by law, and can provide the necessary judicial remedies to parties where necessary, given its applicable law.

Investor demand in syndicated EFSF/ESM bond issuances

The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) were set up at the peak of the European sovereign debt crisis to issue bonds and lend to countries under current funding stress. This study analyses investor demand in syndicated bond issuances of EFSF and ESM from 2014 to 2020 on an unprecedented granularity level using a dataset of individual orders with statistical inference. Particularly, we investigate orderbook dynamics for three main aspects: first, we determine the main factors segmenting investor demand. Second, we analyse price dynamics in the transactions and their relation to investor demand. Third, we investigate whether any indications of orderbook inflation might explain the increased volatility in orderbook volume. We identify issuance tranche and tenor as the main determinants of investor demand that are largely anticipated in the notional. Further, we note that ESM is doing economical pricing, where the new issue premium tends to be lower in a market context with larger demand. Lastly, we find a mixture of an increasing number and an increasing volume of orders as drivers of large order books. This confirms that there are no indications of orderbook inflation tendencies in the analysed time period.

Accountability in pan-European borrowing: mind the gap

The European Union (EU) is now borrowing on the scale of a large state to address challenges ranging from COVID-19 to the war in Ukraine. However, there has been limited comparative research on how pan-European borrowers can and should be held to account. This article offers a normative justification for why such borrowing should be accountable before showing how accountability practices diverge from a set of accountability expectations derived from three baseline theories: liberal intergovernmentalism, sociological institutionalism and historical institutionalism. Through elite interviews and online archival analysis, we show that the vertical accountability of the European Bank for Reconstruction and Development, the European Investment Bank and the European Stability Mechanism to national parliaments in six EU member states varies. Our findings also show that horizontal accountability has been constrained by the European Parliament’s limited involvement in borrowing decisions until recently and that patchy interest from national auditors has undermined diagonal accountability. As EU borrowing increases in importance, these accountability gaps urgently need to be filled.

Nicolas Sarkozy and the Eurozone crisis: federalisation of the EU budget and finance sector

The article explores President of France N. Sarkozy’s contribution to overcoming the eurozone crisis in 2010 by analyzing the strategy of his diplomatic actions, as well as identifying the goals and motivations underlying them. The rescue of the European currency required a close coordination between Paris and Berlin. Despite differing views on the practical modalities related to the implementation of the European Economic Government project, the Franco-German tandem managed to convince the EU partners to take immediate action aimed at improving public financial management practices. Under the pretext of saving Greece from default, the euro zone from disintegration, and the European Union from economic destabilisation, the President of France, with the support of the German Chancellor, achieved the creation of the European Stabilization Mechanism and the European Financial Stability Fund, which were the first autonomous financial structures in the European Union to be managed directly by the bureaucracy in Brussels. Nicolas Sarkozy initiated the EU financial stability collective tools, which are still operating in the EU and functioning in accordance with the logic proposed by France in the midst of the eurozone public debt crisis.

Legal Strategies at the Governance Precipice: Transnational Lawyers in the European Union’s Sovereign Debt Crisis (2010–2012)

How do transnational lawyers valorize their expertise in a political and economic crisis? This article argues that knowing how transnational lawyers valorize their expertise is critical to understanding how transnational law evolves and affects society, especially when existing legal frameworks prove to be inadequate and novel practices must pave new paths. Using the acute phase of the Eurozone crisis between 2010 and 2012 as an empirical case, I examine how European Union (EU) legal agents constructed a framework that accommodated the uncertainty of governing a crisis while also mediating the contentious politics between EU Member States. The analysis shows that as intergovernmental bargaining dominates Eurozone crisis governance, EU legal advisors intervene to reconcile these bargains with the EU legal order using novel practices that simultaneously valorize their legal expertise. These practices in effect engender a high degree of interdependence and interconnection between the EU legal order and several intergovernmental arrangements—especially the European Stability Mechanism—leading to the creation of a unique form of EU governance: semi-intergovernmentalism. This article contributes to debates on legal globalization by empirically examining how transnational legal agents valorize their expertise through strategies directed at defending their autonomy while protecting the normative coherence of their transnational legal order: the EU.

Collective Policy Learning in EU Financial Assistance: Insights from the Euro Crisis and Covid‐19

This article examines policy change in the EU’s financial assistance regime through a collective learning perspective. By defining a financial assistance regime as the set of rules governing the disbursement and withdrawal of funding to the member states in the context of crisis management, the article seeks to address the following research question: How can we explain the exact form of change in the EU’s financial assistance regime between the euro crisis and the Covid-19 pandemic? The article finds that financial assistance in the EU moved from “intergovernmental coordination” with the European Stability Mechanism to a form of “limited supranational delegation” with the Recovery and Resilience Facility and argues that such a change is due to a collective policy-learning process. This finding suggests that the EU tends to learn from past crisis experiences, freeing itself from established institutional constraints, only when the next crisis becomes a concrete cause for concern. However, when the next crisis strikes, the EU is indeed able to radically alter its practices based on previous policy failures.

COVID-19 Pandemic and the Establishment of the Recovery and Resilience Facility

The COVID-19 pandemic was an unprecedented exogenous shock for the European Union (EU) and its Member States, one that demanded a joint response at the EU level rather than several differentiated responses at the Member State level. As such, the pandemic crisis opened up a “window of opportunity” for institutional change in the EU’s financial assistance regime. This change pertains to the development of a set of rules governing the disbursement and withdrawal of funding to Member States in the context of crisis management. The paper thus aims to answer the following question: How did the COVID-19 pandemic affect the EU’s financial assistance regime? Drawing on a revisited historical institutionalist framework that allows for the examination of different types of institutional development, the paper argues that the COVID-19 pandemic constitutes a “critical juncture” for the EU's financial assistance regime, resulting in a shift from intergovernmental coordination (with the European Stability Mechanism) to a form of limited supranational delegation (with the Recovery and Resilience Facility).

Lessons learned from poor governance: A comparison of the EU strategies for exiting the crises of 2008 and 2020

This paper analyses the EU's strategy for recovering from the economic and social consequences of the pandemic, of which the NextGenerationEU temporary stimulus package forms part. That strategy is compared to the diametrically opposite approach taken by EU institutions in the crisis of 2008. The most significant elements and economic policy references adopted in the two cases are identified. The paradigm shift in economic policy is evident, and the errors that led to a double dip in European economies in the handling of the earlier crisis have been avoided. In spite of the better discretionary response, it is argued that there is a need for a permanent, amply endowed, well-designed European stabilisation mechanism free from complexes in regard to the mutualisation of debt, so as to simplify procedures and reduce reaction times in the face of further crises.

On a lender of last resort with a central bank and a stability Fund

We explore the complementarity between a central bank and a financial stability Fund in stabilizing sovereign debt markets. The central bank pursuing its mandate can intervene with public sector purchasing programs, buying sovereign debt in the secondary market, provided that the debt is safe. The sovereign sells its debt to private lenders, through market auctions. Furthermore, it has access to a long-term state-contingent contract with a Fund: a country-specific debt-and-insurance contract that accounts for no-default and no-over-lending constraints. The Fund needs to guarantee gross-financial-needs and no-over-lending. We show that these constraints endogenously determine the ‘optimal debt maturity’ structure that minimizes the Required Fund Capacity (RFC) to make all sovereign debt safe. However, the Fund may have limited absorption capacity and fall short of its RFC. The central bank may be able to cover the difference, in which case there is perfect complementarity and the joint institutions act as an effective ‘lender of last resort’. We calibrate our model to the Italian economy and find that with a Fund contract its ‘optimal debt maturity’ is 2.9 years with an RFC of 90% of GDP, which is above what the European Stability Mechanism (ESM) could reasonably absorb, but may be feasible with an ECB Transmission Protection Instrument (TPI) intervention. In contrast, the average maturity of Italian sovereign debt has been circa 6.2 years, with a needed absorption capacity of around 105% of GDP, which may call for a maturity restructuring to ease the activation of TPI.

A database: How the euro crisis ended: Not with a (fiscal) bang but a whimper

A reform of the fiscal framework in the European Union is currently under discussion. The way ahead is yet unclear. In revisiting the importance of monetary and fiscal policy coordination to reduce uncertainty during the Eurozone Crisis, we add to this discussion a database that comprises daily official data on every policy action from 2007 to 2016 taken by the European Central Bank, the European Commission, and other governmental actors as a free download. Then, we investigate the effect of fiscal policy in an event-study analysis. We find that most measures designed to strengthen the existing Maastricht 1.0 framework of the European Monetary Union (e.g., fiscal compact) are not correlated with yield spreads reduction and do not have any causal effect on uncertainty. Events signaling out financial stability and financial assistance among European Monetary Union member states are likely to have that effect in comparison. After Germany's Bundestag ratified the European Stability Mechanism and when the Federal Constitutional Court approved its legitimacy, yield spreads of Greece, Ireland, Italy, Portugal and Spain significantly decreased.

Investor demand in syndicated EFSF/ESM bond issuances.

The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) were set up at the peak of the European sovereign debt crisis to issue bonds and lend to countries under current funding stress. This study analyses investor demand in syndicated bond issuances of EFSF and ESM from 2014 to 2020 on an unprecedented granularity level using a dataset of individual orders with statistical inference. Particularly, we investigate orderbook dynamics for three main aspects: first, we determine the main factors segmenting investor demand. Second, we analyse price dynamics in the transactions and their relation to investor demand. Third, we investigate whether any indications of orderbook inflation might explain the increased volatility in orderbook volume. We identify issuance tranche and tenor as the main determinants of investor demand that are largely anticipated in the notional. Further, we note that ESM is doing economical pricing, where the new issue premium tends to be lower in a market context with larger demand. Lastly, we find a mixture of an increasing number and an increasing volume of orders as drivers of large order books. This confirms that there are no indications of orderbook inflation tendencies in the analysed time period.

The ESM Reform and Its Missing Legitimacy in Non-Euro Area Member States

The goal of this article is to analyse whether the European Stability Mechanism (ESM) and its current reform have been subjected to sufficient legal and democratic approval in non-euro area Member States. It is argued that the establishment of the ESM and the consequential obligation to accede to it after entering the euro area is at least to a certain extent legally and democratically underpinned by Article 136(3) Treaty on the Functioning of the European Union (TFEU). The establishment of the prospective euro area entrants’ obligation to join the ESM after adopting the euro is a manifestation of the normative value of Article 136(3) TFEU. However, the 2021 ESM reform has not been accompanied by a similar Treaty amendment and thus lacks legal and democratic legitimacy in non-euro area countries. This may have legal and political consequences for the obligation to adopt the euro in the affected countries. ESM, European Stability Mechanism Reform, ESM Treaty, Economic and Monetary Union, euro adoption, euro area entry criteria, Article 136 TFEU, democratic legitimacy

How to minimize negative health effects in the European Union due to the Economic recession caused by the COVID-19 Pandemic

Aims: The article aims to analyze what can be learned from the last Financial Crisis from 2008 on to minimize the negative health effects in the European Union due to the Economic recession caused by the Covid-19 Pandemic. Methods: Systematic literature reviews were conducted to analyze the interventions taken to combat the last Financial Crisis and their consequences on health. Parallel to this, a qualitative document analysis of the ongoing discussion about the measures taken or to be taken in the Covid-19 Pandemic to fight the current economic recession was conducted using institutional websites and international media. Results: The main methods taken to combat the Financial Crisis from 2008 were, bailing out banks, austerity measures, and the European Stability Mechanism. There is evidence that the Financial crisis had negative effects on the European Health Systems in general. Austerity measures in some countries, led to an increase in psychological disorders. Overall mortality was not affected but the decrease of avoidable mortality slowed down. Various economic interventions such as bailing out essential industries e.g., the Aviation sector, cash injections, tax relief, short-work salary compensation, modified ESM, and the Pandemic Emergency Purchase Program (PEPP) were taken during the Covid-19 Pandemic to help stabilize the economy. Conclusion: The current recession is not caused by internal failures of the financial system as it was in the financial Crisis of 2008, but by an outside event - the Covid-19 pandemic. Measures were taken by the governments and the European Union to avoid an economic crisis, and by these, the negative health effects were created during the Financial Crisis in 2008, but the lockdown phase seems to lead to similar negative health effects regarding psychological disorders and delay of planned screening and treatment.

Umschuldungsklausel bei Anleihen der Euro-Staaten

A speciality of contracts seems to be the small print - also in contracts between the members of the European Union. The European Stability Mechanism Treaty (ESM), concluded with the purpose to install the ESM as an international financial institution and as backstop for the Single Resolution Fund (SRF), contains in one of its articles the inconspicuous reference to a mandatory majority action clause. This clause will be modified together with the prepared amendment of the ESM treaty. This amendment offers the perfect opportunity to describe Collective Action Clauses like majority action clauses - facilitating the restructuring of debt - in general and in particular those for sovereign debt of the Euro countries including their effects on the creditors position taking into account the role of the ECB as major creditor.

Banking Nationalism and Resolution in Italy and Spain

AbstractThis article contributes to the comparative literatures on varieties of financial capitalism, economic nationalism and bank resolution with a focus on Spain and Italy's management of bank insolvency and resolution between 2008 and 2018. Both countries' alternative banks faced enormous challenges through prolonged economic decline and declining loan repayments, both turned to depositors to become investors in lieu of attracting arm's-length investors to inject capital, and both had strong connections with local political authorities that resisted bank reform. But Spanish banks were restructured successfully in accordance with EU law while local government ties complicated Italian resolutions. We explain this outcome through two factors: state strength buttressed by outside assistance from the European Stability Mechanism; and strong international marketization, which enhanced the drive to restructure quickly. Spain's decision to ask for loans from the European Stability Mechanism to help restructure its heavily marketized savings banks allowed it to finish reforms after 2012.

Lessons for Left-Wing Populism from the 2010s Austerity Wave in Europe

Lessons for Left-Wing Populism from the 2010s Austerity Wave in Europe

Reset Required: The Euro-area Crisis Management and Deposit Insurance Framework

Abstract The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. This article explains why and proposes a new framework. This could start as early as 1 January 2024 when significant institutions in the euro area will have met requirements to have enough subordinated obligations outstanding to recapitalize the bank if it were to fail. The proposed framework has four components: a single lender of last resort (the European Central Bank); a single presumptive path for resolution (exit via the use of bail-in to facilitate orderly liquidation of the failed bank by the Single Resolution Board under a solvent wind-down strategy); an investor of last resort in a bank’s gone-concern capital (its national deposit guarantee scheme); and a Single Deposit Guarantee Scheme (the Single Resolution Fund with a backstop from the European Stability Mechanism). Together, these measures would limit forbearance, assure bail-in did not touch deposits, promote competition, limit recourse to taxpayer money, standardize resolution procedures for all banks, complete Banking Union and guarantee that a euro of covered deposits would remain a euro, all without forcing national deposit guarantee schemes to reinsure one another. Last but not least the proposed framework would promote financial stability.

The ESM Pandemic Crisis Support Facility: A Changing Conditionality?

Since late 2019, the globe has progressively been affected by a pandemic caused by a new virus named Covid-19. To face the economic and social effects of this crisis, the European Union has predisposed a plan hinged on four pillars. The Support to mitigate Unemployment Risks in an Emergency to provide financial assistance for work and jobs. A fund established by the European Investment Bank in favour of small and medium enterprises. A Recovery Fund to stimulate and support European recovery. A Pandemic Crisis Support facility under which the European Stability Mechanism may provide resources without macroeconomic conditionality in favour of direct and indirect healthcare, cure and prevention related to the Covid-19 crisis. With specific reference to this facility, the absence of macroeconomic conditionality questions its compatibility with the ESM and EU Treaties. This problem could have been cured in the amending process of the ESM Treaty. Unfortunately, it was not so and the solution must be sought elsewhere. This may be done by interpreting the no bail-out rule, holding that the no bail-out rule is suspended or finding that the no bailout rule is satisfied by the national recovery and resilience plans. Alternatively, the facility could have been placed under different umbrellas. However, the exceptional features of the facility are not replicable in the ESM context. ESM, Conditionality, Pandemic Crisis Support facility, Covid-19 Related Healthcare, Justifications

A New Role for the European Stability Mechanism in Post-COVID-19 EMU? Explaining the Failure of the Pandemic Crisis Support and Assessing Ways Forward

Since the establishment of the Pandemic Crisis Support, it has been hypothesized that the European Stability Mechanism might play a new role in stabilizing investments in the European Economic and Monetary Union through a targeted support for the financing of European public goods. The article inquires into the changes in the European Stability Mechanism’s institutional design that could make this possible. It starts by analyzing its lending policy, its accountability structure, and the structure of incentives that underlie negotiations at the Board of Governors. The article then explains the failure of the Pandemic Crisis Support against the background of a neo-institutionalist analysis of the two-level games that develop at intergovernmental fora, and does so through an investigation of the 2020 negotiations that led to the institution of the Pandemic Crisis Support, first, and the The Next Generation EU, later on. Finally, it illustrates which alterations in the institutional design of the European Stability Mechanism could represent a different, and more favorable, structure of incentives for lenders and borrowers.