European financial assistance mechanisms are intended to preserve the financial stability of the EU and the euro area, as financial distress in one Member State can have a substantial impact on macro-financial stability in other Member States. Financial assistance is linked to macroeconomic conditionality (it is a loan rather than a fiscal transfer), to ensure that Member States receiving such assistance implement the necessary fiscal, economic, structural and supervisory reforms. The reforms are agreed and set out in specific documents (memoranda of understanding) published on the Commission website and, when relevant, on the European Stability Mechanism website. As part of the EU response to the COVID-19 crisis, a number of additional financial instruments were put forward to help the Member States recover and make their economies more resilient to shocks.
Primary legal framework
- Article3 of the Treaty on European Union (TEU);
- Articles2-5, 119-144 and282-284 of the Treaty on the Functioning of the European Union (TFEU);
- Protocols4, 12, 13 and 14annexed to the TFEU.
Objectives
Mechanisms for the provision of financial assistance to Member States are designed to preserve the financial stability of the EU and the euro area. They are fundamental elements of a stronger economic and governance framework for Economic and Monetary Union (2.6.4).
Achievements
A.In May2010, the EU Member States set up a temporary stabilisation mechanism to preserve their financial stability in the context of the sovereign debt crisis. It comprises the following two loan programmes:
1.The European Financial Stabilisation Mechanism (EFSM)
Under the EFSM, the Commission is allowed to borrow up to a total of EUR60billion on financial markets on behalf of the Union under an implicit EU budget guarantee. The EFSM can provide assistance to all EU Member States.
The mechanism has been activated for Ireland, Portugal and Greece (as bridge financing).
Since the creation of the European Stability Mechanism (ESM), the EFSM remains in place to address, in particular, exceptional situations where practical, procedural or financial reasons call for its use, generally before or alongside ESM financial assistance.
2.The European Financial Stability Facility (EFSF)
The EFSF, which was established by euro area Member States as a temporary mechanism, has a total effective lending capacity of EUR440billion. Loans are financed by the EFSF’s bonds and other debt instruments on capital markets, and are guaranteed by the shareholders (euro area Member States).
The facility was activated for Ireland, Portugal and Greece. Since the creation of the ESM, the EFSF does not provide any further financial assistance.
B.October2012 saw the creation of the permanent support mechanism in the shape of the European Stability Mechanism (ESM), which was established by an intergovernmental treaty (i.e. outside the EU legal framework).
The ESM is currently the sole and permanent instrument for financial assistance to euro area Member States. It has an effective lending capacity of EUR500billion. Loans are financed by the ESM’s borrowings on financial markets and are guaranteed by the shareholders (euro area Member States).
The ESM has provided financial assistance to Spain, Cyprus and Greece. The Commission and the ESM have established detailed procedures for their working relationship in providing assistance to euro area Member States.
The ESM offers financial assistance through different lending instruments. As part of the EU response to the COVID-19 crisis, the euro area Member States agreed on a new temporary instrument – the Pandemic Crisis Support instrument.
In November2020, euro area Member States reached an agreement on a reform of the ESM Treaty with a view to strengthening its toolbox and mandate. Key changes include the establishment of a common backstop to the Single Resolution Fund (SRF) as a safety net for bank resolution, a stronger role in the definition and monitoring of financial assistance programmes as well as additional instruments to promote debt sustainability. The amended Treaty is currently pending ratification in Italy before it can enter into force.
C.On 6December2017, the Commission made a proposal to transform the ESM into a European Monetary Fund (EMF).
This new body would be anchored within the EU’s legal framework, while at the same time essentially preserving the financial and institutional structures of the ESM. In addition, the EMF would provide the common backstop to the Single Resolution Fund (SRF) as part of the Banking Union. In March2019, Parliament adopted a resolution on the Commission proposal. May2013 saw the entry into force of the ‘Two-Pack’, which consists of two EU regulations ((EU)No472/2013 and (EU)No473/2013) applicable to Member States whose currency is the euro. It is one of the building blocks of a stronger economic and governance framework within the EMU.
In particular, Regulation (EU)No472/2013 strengthens the monitoring and surveillance procedures for Member States experiencing, or threatened with, severe difficulties with regard to their financial stability or the sustainability of their public finances.
Under this regulation, the Commission may decide to subject a Member State to enhanced surveillance if its financial stability difficulties are likely to have spillover effects on the rest of the euro area. A Member State that requests financial assistance has to prepare a draft macroeconomic adjustment programme in agreement with the Commission (acting in liaison with the ECB and, where appropriate, the IMF).
The provision of financial assistance is thus linked to macroeconomic conditionality – a set of measures intended to address the sources of instability. This ensures that Member States receiving such assistance implement the necessary fiscal, economic, structural and supervisory reforms.
Financial assistance is disbursed in tranches and may therefore be suspended if the beneficiary Member State does not comply with the obligations specified in the adjustment programme.
D.The balance of payments assistance facility
Since February2002, the balance of payments (BoP) assistance facility has been available to non-euro area Member States experiencing, or seriously threatened with, external financing constraints.
The loans usually take the form of medium-term financial assistance, typically in cooperation with the IMF. Financial assistance is conditional on the implementation of policies designed to address underlying economic problems. Balance of payments financial assistance has been granted to Hungary, Romania and Latvia.
E.EU COVID-19 response
As a response to the COVID-19 crisis, the EU put forward a comprehensive response that included a number of financial instruments to support the Member States’ efforts in fighting the crisis and its effects. These include the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and the NextGenerationEU (NGEU), in particular through the Recovery and Resilience Facility (RRF).
Role of the European Parliament
By adopting the ‘Two-Pack’, Parliament has helped to establish an EU legal framework for enhanced economic governance in the euro area, in terms of both budgetary surveillance and the decision-making and surveillance procedure for Member States under a macroeconomic adjustment programme.
Moreover, the ‘Two-Pack’ gives Parliament a tighter scrutiny role in that the competent committee can invite the institutions concerned (the Commission, the Council, the Eurogroup, the ECB and the IMF) to engage in economic dialogues with Parliament. The competent committee in Parliament has the right to be informed at various instances, namely when a macroeconomic adjustment programme is being prepared and on its implementation.
In2023, Parliament and the ESM agreed on a Memorandum of Cooperation (MoC) establishing the framework of cooperation between the European Parliament and the European Stability Mechanism. The MoC aims to improve interinstitutional dialogue between the ESM and Parliament and enhance the ESM’s transparency and accountability. The MoC stipulates that the EP’s competent committee is to invite the ESM Managing Director to take part in an exchange of views at least once a year. The MoC also details other forms of cooperation for further transparency, including an informal visit of a delegation made up of MEPs to the ESM’s headquarters once a year and the possibility for the Chair of the competent committee to send written questions to the ESM Managing Director on matters falling within the scope of the ESM.
What is more, Parliament has the mandate to scrutinise the RRF, notably through regular recovery and resilience dialogues with the Commission and through its ad hoc RRF Working Group.
For more information on this topic, please see the website of the Committee on Economic and Monetary Affairs and of the Committee on Budgets.
MAJA SABOL / GIACOMO LOI
