European Stability Mechanism Research Articles

Reforming the European Stability Mechanism: Too Much but Never Enough

Reforming the European Stability Mechanism: Too Much but Never Enough

FINANCING THE CORONA CRISIS IN EUROPE

On the 9th of April, after two days of negotiations on a European financing programme to deal with the Corona crisis the finance ministers of the euro area agreed, amongst other things, on a line of credit provided by the European Stability Mechanism (ESM). All furtherreaching proposals from France, Italy and Spain, but also from many respected economists in Germany, are thus off the table for the time being. Nevertheless, the German government has succeeded in presenting this as a breakthrough in European solidarity. The headlines of the world press spoke of a line of credit of 240 billion euro. According to Politico on April 10 "The ESM will make €240bn available in spending for indebted countries." The Süddeutsche Zeitung already titled "240 billion from rescue aid" on March 25. On the homepage of the German government it says "The Eurogroup has agreed on a 500 billion euro protection program." This indirectly puts the ESM loans at EUR 200 billion.2 These are widespread but misleading claims, as we will show here.

Fiscal Integration in an Experimental Union: How Path-Breaking Was the EU's Response to the COVID-19 Pandemic?

Fiscal Integration in an Experimental Union: How Path-Breaking Was the EU's Response to the COVID-19 Pandemic?

Failing outward: power politics, regime complexity, and failing forward under deadlock

ABSTRACT Failing forward describes an endogenous cycle of EU institution-building through lowest-common denominator breakthroughs in Council. This article adds a dynamic called failing outward, in which a powerful country steers EU law and policy from outside the EU. Where strong Council deadlocks persist during crises, and a powerful state possesses a critical, excludable resource, it will make access conditional on EU rules and institutions that reflect its own interests rather than Council compromises. A non-EU institution helps it do this, entrenching conditionality. Repeated institutional fixes follow as the system fails (some) other Member States. This model is applied to Germany’s effective authority through the European Stability Mechanism over Council and Commission in determining EMU reforms, including Banking Union.

EU financial assistance during COVID-19 pandemic: Are loans the solution?

This article deals with the European Union’s reaction to the COVID-19 pandemic. The current crisis is having a negative impact on national economies. Based on legitimate concerns about the fiscal stability of the euro area and the EU as a whole, the Union has adopted a number of measures to support the Member States. As part of the solution to the coronavirus crisis, we cannot ignore the role of the European Stability Mechanism, in which financial assistance has been earmarked for euro area members. The article focuses on three instruments providing financial assistance in the form of loans: Pandemic Crisis Support, Support to mitigate Unemployment Risks in an Emergency (SURE) and the Pan-European Guarantee Fund. This EUR 540 billion rescue package was agreed by the Eurogroup on 9 April 2020. The article aims to identify the differences between these instruments and their target groups by analysing and comparing their legal bases, conditions and economic impact. As part of the contribution, we also mention countries that are not members of the euro area but have drawn assistance in the form of loans from the mentioned funds.

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. Conflict of interest: None declared.

Tug of War over Financial Assistance: Which Way Forward for Eurozone Stability Mechanisms?

This article analyses the development of financial assistance in the Eurozone since 2010. It argues that reforms to instruments and bodies, notably the European Financial Stability Facility, the European Stability Mechanism, and the current Covid-19 recovery fund, are best explained by a re-occurring pattern of negotiations between potential creditors and debtors based on common Eurozone interests and national cost-benefit considerations. Building on a liberal intergovernmentalist approach, this article shows how this pattern influenced the step-by-step reform of financial assistance in the Eurozone. The threat to Eurozone stability served as a constant factor encouraging member states to expand and deepen the assistance formula. Creditors’ cost-benefit considerations were key for retaining disincentives, a limited liability for common debt, and intermediary borrowing and lending within the financing design. However, on the back of common Eurozone interests, debtors were able to push for an increase in assistance, an expansion of assistance into areas of banking sector support, and a softening of moral hazard elements in the more recent Covid-19 pandemic. Due to creditors’ continuous insistence on safeguards and limited burden-sharing, reform outcomes were repeatedly unable to resolve the difficulties at hand.

On selling sovereigns held by the ECB to the ESM

A repetition of austerity policies of the early 2010s is not consistent with maintaining adequate growth and sovereign debt sustainability in the post-pandemic environment, argue the authors of this CEPS Policy Insight. Likewise, a debt restructuring process with deep haircuts will just upset the fragile state of the markets and create a run on the debt of the most vulnerable member states, forcing the ECB to buy even more debt. Common policies are thus required to keep the sovereigns acquired by the ECB with its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) programmes out of financial markets for an indefinite period. The European Stability Mechanism (ESM) can offer the appropriate instrument by purchasing the ECB-held sovereign debt and issuing own liabilities to fund the purchases. The programme could develop gradually, over several years, to ensure the smooth rollover of expiring securities. As the purchases would be funded by the ESM’s own liabilities, backed by the sovereign holdings, ESM debt would become the long- sought-after European safe asset. The authors argue that this ESM action could be conducted without an ESM Treaty change. It would be premised on the legal framework of the revised Article 14 (precautionary financial assistance). The ESM could then gradually evolve into a debt management agency for the euro area. The transfer of much of ECB sovereign holdings to the ESM would restore monetary policy independence and ease any frictions in this field, thereby allowing EU policymakers’ focus to shift to the completion of the European Banking Union. This paper follows up on a CEPS Policy Insight of October 2020, in which Stefano Micossi argued that the increase in sovereign indebtedness under way in the euro area should be managed through collective policy actions.

The evolution of European bailout arrangements and its impact on sovereign bond yields in the aftermath of the euro crisis

AbstractThe 2010–2012 euro crisis prompted a wave of institutional reforms in the European Economic and Monetary Union (EMU), and one of the most remarkable changes was the creation of a permanent bailout facility for troubled sovereigns. The birth of the European Stability Mechanism (ESM) in 2012 was preceded by harsh debates, reflecting a conflict between a German view of country-level responsibility and French-Italian calls for more risk sharing. These tensions have remained ever since, which was also highlighted by conflicts regarding the ESMs overhaul at the end of 2019. Concerns of Italy then drew attention to the fact that a wide range of issues prevented the community from finalizing the post-crisis structure of the eurozone. This paper focuses on the evolution of the EMU financial assistance framework up until the latest efforts for its reform. We analyse the impact of related policy announcements on changes in sovereign bond yields of Italy, Spain, Portugal and Ireland (i.e. the most vulnerable countries during the euro crisis). Our findings show that news on bailout arrangements significantly contributed to a contemporaneous moderation of periphery bond yields, especially in the case of shorter maturities. This result hints at the role of common facilities in supporting financial stability. To enhance this feature, a ‘package approach’ (i.e. multiple reforms together, as stressed by Italy) may well need to be considered. Such a broad perspective can help strengthen the euro area once the acute threat of the coronavirus pandemic is averted.

Single-Limb Collective Action Clauses and the European Stability Mechanism Reform

In December 2019, the Euro Summit did not approve the amendments to the ESM Treaty because of a disagreement among Member States on debt restructuring as a requirement for stability support in the case of unsustainable debt and questionable capacity of repayment. In this context, a key role is played by single-limb CACs which permit restructuring across all the bond series. On the one hand, this facilitates the restructuring process and neutralize the blocking action of vulture funds under single series. On the other hand, this poses some problems in relation to the protection of minor bondholders. The solution to these problems may come from inserting a sort of exemption clause in the model CACs that the EU Economic and Financial Committee is mandated to draft. This scenario is now exacerbated by the social and economic effects of the Covid-19 pandemic crisis that have caused a generalised increase in sovereign indebtedness and may imply debt restructuring. ESM treaty reform, debt restructuring, single-limb CACs, protection of minor bondholders, Covid-19 crisis

Sovereignty and Legitimacy in the Economic and Monetary Union: the case of the European Stability Mechanism

Sovereignty and Legitimacy in the Economic and Monetary Union: the case of the European Stability Mechanism

Risk Management for Sustainable Sovereign Debt Financing

The sharp increase of sovereign debt internationally, since the 2008 global financial crisis, decisively contributed to several sovereign debt crises. The current COVID-19 pandemic and the fact that public debt remains high globally, have prompted a renewed interest in debt sustainability analysis (DSA) and in policy discussions concerning the most appropriate variables. We develop a normative DSA model to manage tail risk and optimize debt-financing decisions with sustainability conditions on debt stock and flow, under macroeconomic, financial, and fiscal uncertainty. We show that a risk management view alters a government’s debt-financing policy to manage tail risk better. Many uncertain variables confound the problem, and portfolio optimization using stochastic programming on scenario trees provides a versatile and effective tool to achieve sustainable debt dynamics. The model is an essential building block of the European Stability Mechanism framework to assess debt sustainability of eurozone member states, including the repayment capacity of crisis countries under €295bn assistance programs.

Пандемия COVID-19 как вызов франко-германскому лидерству в ЕС

The study is focused on the COVID 19 pandemic as a challenge for Franco-German leadership in the European Union. The authors investigate whether joint actions by Berlin and Paris can strengthen the EU’s resilience to crises. As it is shown, the first isolationist reaction of the EU states to pandemic was followed by their attempts to find a common decision. The negotiations on an anti-crisis plan were complicated by the division of the European Union states into opposing camps. Two projects proposed by them – the European Stability Mechanism (ESM) and the “coronabonds” – reflected the narrow interests of rich, frugal “Northern” and economically modest “Southern” groups, and failed. In contrast, the Franco-German cooperation became a breakthrough. In March-April 2020, Germany and France opposed each other, supporting ESM and coronabonds, respectfully. In May-June 2020, A. Merkel and E. Macron agreed to a compromise and came up with a unified position. While Germany left “frugal” group by agreeing to allocate money to support the “South” without insisting on mandatory reforms, and endorsed the idea of joint debt obligations, France refused to support the “Southern” coronabond project and agreed to the mediation of the EU Commission. That gave new breath to negotiations where a new regrouping of countries took place: the “South” states failing to defend coronabonds supported the Franco-German plan based on subsidies, while the “frugals” put forward an alternative based on loans. The EU Commission’s project which included both proposals was discussed in July 2020: at that moment, the Franco-German tandem backed by the “South” states had to persuade both the “frugal” and the East- European states. Finally, the EU Commission’s plan promoted by Merkel and Macron was adopted, though with serious adjustments. The authors conclude that the Franco-German alliance has confirmed its capability to strengthen the European Union resilience, but its leadership is no longer unconditional, and in the future, they should take into account the interests of the EU regional groups. Acknowledgments. The article was prepared within the project “Post-Crisis World Order: Challenges and Technologies, Competition and Cooperation” supported by the grant from Ministry of Science and Higher Education of the Russian Federation program for research projects in priority areas of scientific and technological development (Agreement № 075-15-2020-783).

Reform of the EU's Own Revenues and Covering ahe Expenditures Incurred by the Corona Crisis

This contribution focus on the revenue side of the EU budget, which consists of own resources, divided into traditional resources, income in the form of a share of value-added tax, and gross national income. On 21 July 2020, the European Council agreed on a multiannual financial framework for the period 2021-2027, and in response to the pandemic situation associated with Covid-19, a temporary recovery instrument for the next generation of the EU was agreed. At the same time, from which it was apparent that it is necessary to find new own resources for the EU, and how the European Stability Mechanism (ESM) could be used to the consequences of the corona crisis. The author will focus mainly on issues on the revenue side of the Union budget and the role of the ESM. Within the ongoing debates when the result was the coronavirus response the question arises of whether it would be appropriate and effective to introduce a common tax for the EU. The main aim of the contribution is to use the descriptive method, the method of analysis and synthesis the revenue side system of the EU budget, and the reform efforts that culminated in the reform of own resources. In the last part of the article, the author using a descriptive method on how the ESM was activated as one of the walls to maintain the stability of the euro area. Including the view of introducing a common European tax as a fiscal instrument to cover the expenditures (debt) incurred related to coronavirus response i.e. recovery instrument Next Generation.

DETERMINANTS OF THE CAPITAL STRUCTURE OF EUROPEAN FIRMS: THE MODERATING ROLE OF EFSF/ESM FINANCIAL ASSISTANCE PROGRAMS

The present study has investigated the moderating effect of the European Financial Stability Facility (EFSF) / European Stability Mechanism (ESM) support to the firms’ indebtness. Using dynamic panel data, three models were estimated and aimed at the determination of the way that EFSF/ESM financial assistance programs could influence the impact of five firm-specific characteristics, namely growth, profitability, size, tangibility and non-debt tax shield on the capital structure of European firms. Data from 2,086 firms for the period 2003 – 2016 were used, and two dummy variables; one for the EFSF/ESM support period and one for any kind of economic crisis period were formed. The results indicated that pecking order prevailed over trade-off theory. Economic crises did not affect severely the firm-characteristics’ effects, but the EFSF/ESM programs influence appeared in three cases. During the period of EFSF/ESM assistance, profitability’s negative effect on long-term debt ratio disappeared and on total debt ratio strengthened, growth’s positive impact on total debt ratio diminished and non-debt tax shield acquired positive influence on total debt ratio. These changes might be explained by the increased levels of tax rates and decreased levels of uncertainty that the EFSF/ ESM programs caused, as well as by the reluctance of lenders to provide new funds.

Reset Required: The Euro Area Crisis Management and Deposit Insurance Framework

The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. Currently the framework is far more likely to manufacture a crisis rather than enable the authorities to manage one. Specifically, the current framework is far more likely to trigger the doom loop between weak banks and weak governments than to terminate or untie it. Nor will the current framework necessarily protect deposits. There is no guarantee that a euro in covered deposits will remain a euro, if the bank in which the deposit is held fails, and/or the Member State in which the failing bank is headquartered defaults. The CMDI framework aims to enhance financial stability, limit recourse to taxpayer money, promote competition and protect depositors. These policy objectives remain valid. What needs to change is the method that authorities use to achieve those objectives. First, the approach needs to integrate micro- and macro- aspects of crisis management. In particular, the approach needs to take account of the prospective roles of the European Stability Mechanism, both as a provider of credit to Member States as well as a guarantor of the Single Resolution Fund. Second, the approach needs encompass the central bank as a provider of liquidity to banks individually and to the market as a whole. Finally, the approach needs to recognize that by the time any reform proposed as a result of this review would become effective, the SRB and the significant institutions in the euro area will have completed the transition and become fully resolvable via bail-in. This affords the euro area the opportunity to reset expectations about resolution. The euro area should take this opportunity to make the crisis management and deposit insurance framework more European and more uniform. Specifically, there should be a single presumptive path for dealing with failed banks: the use of bail-in to facilitate the orderly liquidation under a solvent- wind down strategy. This will protect deposits and set the stage for the transformation of the Single Resolution Fund (SRF) into the Single Deposit Guarantee Scheme (SDGS) with a backstop from the European Stability Mechanism (ESM). In addition, measures should be taken to avoid forbearance, including the transfer of responsibility for emergency liquidity assistance (ELA) from national central banks to the ECB to create a single lender of last resort. Finally, national deposit guarantee schemes should become investors of last resort in the gone-concern capital of the failing bank. This will ensure that the orderly liquidation approach extends to all banks, including those without access to capital markets. Together, these measures would complete Banking Union, promote market discipline, avoid imposing additional burdens on taxpayers, help untie the doom loop between weak banks and weak governments, strengthen the euro and enhance financial stability.

Locally decentralised responses to the European recovery: exploring the role of the Euratom Treaty and the ESM

The pandemic stressed the key role of sustainable consumption and production patterns and highlighted the role of local systems as key actors of a recovery aiming at enhanced resilience to endogenous and exogenous shocks. Although the Recovery Plan marked a radical shift in the attitude of the EU towards crisis management and allowed for an unprecedented joint financial effort, it might not be enough for tackling the challenges ahead. In this paper we suggest that two instruments should be further explored for this purpose: the Euratom Treaty and the European Stability Mechanism.

FINANCING THE CORONA CRISIS IN EUROPE

On the 9th of April, after two days of negotiations on a European financing programme to deal with the Corona crisis the finance ministers of the euro area agreed, amongst other things, on a line of credit provided by the European Stability Mechanism (ESM). All furtherreaching proposals from France, Italy and Spain, but also from many respected economists in Germany, are thus off the table for the time being. Nevertheless, the German government has succeeded in presenting this as a breakthrough in European solidarity. The headlines of the world press spoke of a line of credit of 240 billion euro. According to Politico on April 10 "The ESM will make €240bn available in spending for indebted countries." The Süddeutsche Zeitung already titled "240 billion from rescue aid" on March 25. On the homepage of the German government it says "The Eurogroup has agreed on a 500 billion euro protection program." This indirectly puts the ESM loans at EUR 200 billion.2 These are widespread but misleading claims, as we will show here

The Reform of the European Stability Mechanism: Process, Substance, and the Pandemic

The European Stability Mechanism (ESM) has been instrumental in safeguarding the financial stability of the Euro area and of its Member States. This article looks at the tumultuous process of reforming the ESM. It analyses the main changes that would be brought about by the draft revised ESM Treaty, whose text was agreed upon in June 2019 and finalized in December 2020. These concern the ESM’s purposes and operations; the procedure for granting stability support to a Euro area Member State; precautionary financial assistance instruments; single-limb collective action clauses; and the common backstop to the Single Resolution Fund. The focus then shifts to the changes agreed upon in response to the COVID-19 crisis. A new credit line has been introduced, the Pandemic Crisis Support, which builds on an existing instrument. It is argued that the reforms posited in the draft revised ESM Treaty would plug important gaps in the framework of the Economic and Monetary Union. Nevertheless, some of the ESM’s underlying vulnerabilities would remain, notably as regards its governance, the status of non-Euro area Member States, and the framework for its transparency and accountability. A more comprehensive reform could have taken place, which would have improved upon the overall structure of the Euro area. European Stability Mechanism, ESM Treaty, ESM reform, Pandemic Crisis Support, European Monetary Fund, economic governance, accountability

The evolution of European economic institutions during the COVID-19 crisis.

This article argues that the incomplete economic and institutional integration of the euro area has exposed the monetary union to increasing economic divergence, which could be deepened by the COVID‐19 crisis. We discuss how monetary and fiscal measures implemented at the onset of the pandemic have contributed to mitigate the economic consequences of lockdowns, but provided limited insurance to narrow economic gaps across member countries. However, EU countries agreed on July 21, 2020 to develop, for the first time, countercyclical fiscal transfers financed by common debt issuance. We discuss the potential of this instrument to contribute to improve the resilience of the eurozone.