The European Stability Mecanism

Arthur PEILLON                                                 Academic year 2016-2017
Rayan SABOURI                                                 course: European Integration

The European Stability Mechanism (ESM)

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Homework made as part of the 1st year of the International Business and Law program (IBL) at IESEG School of Management and Faculté Libre de Droit

Introduction

        The European debt crisis represents a series of financial events that affected, since the beginning of 2010, the economies of the Member States of the European Union, whose reference currency was the euro. This crisis is considered as a result of the global financial crisis of 2007-2008 and the process of globalization of finance, which means that economies of all around the World are interdependent. Indeed, the subprime mortgage crisis first took place in the United-States, but the European Union has also been concerned. However, the Eurozone crisis is not only the result of external complex factors: several Eurozone member states (Greece, Portugal, Ireland, Spain and Cyprus) were unable to repay their government debt because of fiscal policy choices related to government revenues and expenses. Nevertheless, this is also an illustration of a lack of anticipation from the European Union. Indeed, the structure of the Eurozone did not include any fiscal union at this time. The ability of European leaders as France or Germany to respond to this crisis were very weak.
        The European Financial Stability Facility (EFSF) was created for the Eurozone in June 2010 in order to provide financial assistance to Ireland, Portugal and Greece. Moreover, the same year, the European Financial Stabilization Mechanism (EFSM) has been created for the European Union. Finally, in order to consolidate and merge these two mechanisms, the European Stability Mechanism (ESM) has been voted the 23rd of October 2011, ratified the 2nd of February 2012 and was inaugurated the 8th of October 2012. Since 2013, the ESM is the sole and permanent mechanism for responding to new requests for financial assistance by euro area Member States. Located in Luxembourg City and composed by 153 staff members, directed by the Managing Director Klaus Regling, it provides instant access to financial assistance programs to the 19 euro area member states.                                                 Consequently, it is appropriate to ask a question that will constitute the main basis of the work: Does the European Stability Mechanism (ESM) represent a consistent long-term solution?
        Therefore, even if the ESM is the sole and permanent mechanisms for financial issues, constituting an important component of the comprehensive European Union strategy designed to safeguard financial stability within the Eurozone (PART 1), this ESM architecture has major problems that weaken the consistency of this mechanism in the long run (PART 2).

Table of contents

Introduction        2

1) The ESM: the major component of the comprehensive European Union strategy designed to safeguard a financial stability within the Eurozone        4

1.1) An international organization using lending instruments for the benefit of its members: a financial solidarity based on contributions.        4

1.2) An objective bailout policy: a financial assistance under particular concrete conditions        4

2) The ESM architecture facing major problems, weakening the consistency of this mechanism in the long run.        4

2.1) the symbol of the European Union authority, over the popular sovereignty: a lack of democracy?        4

2.2) Implementation of policies of austerity: ineffective measures and counterproductive consequences?        4

Conclusion        4

Bibliography………………………………………………………………………………………………………………………………………11

1) The ESM: the major component of the comprehensive European Union strategy designed to safeguard a financial stability within the Eurozone

        In a crisis context, the ESM seems to be a potential solution. We will see to what extend the ESM is financed by its members (Subsection 1) then we will observe the criteria of selection therewith to benefit from the bailout (Subsection 2).

1.1) An international organization using lending instruments for the benefit of its members: a financial solidarity based on contributions.

        First of all, the concept of ESM depends of its member. Indeed, every member of the organization has to contribute to the funding of the ESM.  Most of the members have to contribute to the funding according to a unique percentage. For instance, Germany and France represent 47% of contribution to ESM while Cyprus contributes to 0,19%. Effectively, the amount that countries have to pay as participation depends on their nominal GDP. You will find below a document from 2014 originating from the Bank of Italy, which shows the different amount spent by the members. 

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        The ESM provides financial support to his members. The total subscribed capital is around €700 billion, with paid-in capital of €80 billion. The ESM lends, in necessity, directly to governments. It can also buy their debts. In fact, the four-year organization may grant loan to countries or even buy primary or secondary debt from its members if some conditions are respected. Through those actions, the ESM can participate to the recapitalization of the country. Indeed, the purchases of states’ bond will give more liquid assets to the State, which have to submit to different conditions that we will study in the second subsection. In complement, the ESM may support banks by providing funds. This would be a recapitalization, and the ESM would get a shareholding.

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