DOCSLIB.ORG

The European Stability Mechanism Articles

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The European Stability Mechanism Articles THE EUROPEAN STABILITY MECHANISM ARTICLES The global fi nancial crisis has exposed major weaknesses in the design and implementation The European of the existing economic governance framework of the EU, and of the euro area in particular. Stability Mechanism The fi scal rules (laid down in the Stability and Growth Pact) have been weakened over time, and procedures and measures put in place to enforce economic policy coordination have not been implemented. The European Council of 24-25 March 2011 adopted a comprehensive package of measures to respond to the ongoing crisis, as well as to guard against such crises materialising in the future. The main features of this package relate to the strengthening of the preventive and corrective mechanisms to address internal and external imbalances, in particular fi scal imbalances and competitiveness problems of individual Member States, well before they might pose systemic threats. In addition, the package includes the establishment of a permanent crisis management mechanism as an ultima ratio safeguard against imbalances in individual countries. It is foreseen that the new European Stability Mechanism (ESM) will enter into force on 1 July 2013, following an amendment to the Treaty on the Functioning of the European Union (the Treaty) and the signing of an ESM Treaty by the euro area countries. This article outlines the underlying rationale for the establishment of the ESM and looks at its salient features.1 From the ECB´s perspective, it is crucial that the existence, design and activities of the ESM do not create moral hazard, but rather strengthen the incentives for prudent fi scal and economic policies in all euro area countries. For this reason, it is essential that any fi nancial assistance will be subject to very strict macroeconomic policy conditionality and be granted on non-concessional terms. Financial assistance must not act as a fi scal transfer, but only as a liquidity bridge that allows euro area countries in distress to “buy time” to take the necessary measures to restore fi scal sustainability and competitiveness in the medium term. The ESM would be activated if indispensable to safeguard fi nancial stability in the euro area as a whole. It is therefore of the utmost importance that the range of measures focusing on crisis prevention and policy surveillance are well-designed and implemented in full so as to avoid the need to use the ESM. 1 WHY IS A PERMANENT CRISIS MANAGEMENT time reduces the net benefi ts of EMU and poses MECHANISM HELPFUL? the risk of adverse cross-country spillovers. The Treaty contains two key provisions aimed The institutional framework of Economic and at avoiding excessive debt accumulation at the Monetary Union (EMU) is unique.2 EMU is a national level and protecting the independence monetary union without a fully fl edged political of the ECB: the “no-bailout” clause (Article 125) union. It is characterised by a single monetary and the monetary fi nancing prohibition policy set at supranational level (i.e. the (Article 123). These provisions preclude euro area), a common market, and largely transfers and monetisation of government debt decentralised fi scal policies, which remain in the event of a debt crisis in a Member State. within the area of competence of the individual They will remain cornerstones after the reform EU Member States but which are subject to of EU economic governance. rules-based coordination procedures, such as the Stability and Growth Pact. 1 At the time of writing, the Treaty establishing the European The smooth functioning of EMU requires that Stability Mechanism (ESM Treaty) is still in the process of national governments ensure the sustainability of fi nalisation. 2 For a more detailed discussion of the institutional arrangements, their own public fi nances, the competitiveness of see the article entitled “One monetary policy and many their national economies and the stability of their fi scal policies: ensuring a smooth functioning of EMU”, Monthly Bulletin, ECB, July 2008 and the article entitled fi nancial systems. Failure to meet one or more “The relationship between monetary policy and fi scal policies in of these conditions over a sustained period of the euro area”, Monthly Bulletin, ECB, February 2003. ECB Monthly Bulletin July 2011 71 At the same time, the fi nancial crisis has stage. In addition to these EU-wide proposals at revealed major weaknesses and gaps in the the legislative level, a separate “Euro Plus Pact” existing governance framework. The fi scal rules has been devised among euro area countries, (laid down in the Stability and Growth Pact) have with an opt-in for non-euro area EU Member been weakened over time, and procedures and States, in order to improve competitiveness, measures put in place to enforce economic policy foster employment, increase the sustainability coordination have not been implemented. If of public fi nances and reinforce fi nancial these weaknesses and gaps were left unaddressed, stability. These measures complement the the fi nancial stability of the euro area as a whole strengthening of the supervisory architecture could be put at risk. EMU is characterised for the fi nancial system that came into force at by a high degree of economic and fi nancial the beginning of 2011 with the establishment of integration among its members, which in normal the European Systemic Risk Board (the new EU times is benefi cial to all members. In times of body in charge of macro-prudential oversight) crisis, however, close fi nancial integration means and the three new European Supervisory that unsustainable developments in one member Agencies – the European Banking Authority, country can easily spread to others perceived as the European Securities and Markets Authority vulnerable by the market. and the European Insurance and Occupational Pensions Authority. Once fully operational, Strengthened fi scal, macroeconomic and macro- these measures should strengthen the economic prudential surveillance is essential to guard pillar of EMU. against destabilising cross-country spillovers which might stem from a loss of confi dence in Strict observance of the Stability and Growth the sustainability of national policies. Pact, close surveillance of macroeconomic The failure of the EU’s economic governance to imbalances and effective economic policy prevent and correct unsustainable national coordination should provide a safeguard against policies that contributed to the build-up of major crises of confi dence of the type and magnitude imbalances in euro area countries has made that have been experienced in the recent past. the defi ciencies of the overall governance However, to the extent that unforeseen external framework all too apparent. This applies in shocks can occur, the risk of crises can never particular to the weak implementation of policy be fully eliminated, in spite of strengthened recommendations, the inadequacy of enforcement fi scal and macroeconomic surveillance. measures taken to discourage or correct For this reason, and in order to ensure the infringements, and the insuffi cient recognition stability of the euro area as a whole, it was by national policy-makers of the need to ensure decided to also establish a framework which consistency between national policies in a could provide temporary fi nancial support to monetary union, especially with regard to euro area countries, with the aim of providing competitiveness developments.3 bridge funding for the period of time needed to implement a deep adjustment programme to The European Council, at its meeting on correct imbalances and regain market access. 24-25 March 2011, agreed on a number of Any fi nancing under the ESM needs to be important steps to reinforce the EU economic subject to very strong policy conditionality. governance framework. The Stability and Growth Pact will be reformed to enhance the The purpose of such a crisis management surveillance of fi scal policies and to foster the framework is to give euro area countries in early application of enforcement measures. distress the time necessary to implement measures A new macroeconomic surveillance framework, including an enforcement mechanism, will be 3 See the article entitled “The reform of economic governance established in order to deal with internal and in the euro area: essential elements”, Monthly Bulletin, ECB, external macroeconomic imbalances at an early March 2011. ECB Monthly Bulletin 72 July 2011 ARTICLES to restore fi scal sustainability, competitiveness market fi nancing. For example, an exogenous The European and fi nancial stability in the medium term. shock of unprecedented magnitude might Stability Mechanism Financial assistance will only be granted if the hit one euro area country asymmetrically, country in question implements an adjustment with profound implications for the country’s programme capable of redressing the situation. domestic economic outlook. Given the greater Such an adjustment programme will in general propensity towards cross-country spillovers in a include fi scal consolidation measures and monetary union, and the lack of a central fi scal structural reforms that address labour and authority, such a shock could have the potential product market rigidities, thereby improving to destabilise the euro area as a whole (in the the growth potential of the economy. While absence of a fi nancial fi rewall). The potential for such measures will have some impact in the negative (and mutually reinforcing) feedback short term, their full effect often unfolds over loops between the fi scal and fi nancial sectors the medium term. In this context, the fi nancial could be signifi cant and both amplify and assistance will serve as a liquidity bridge until propagate the shock. the country in question regains market access. At the same time, fi nancial assistance must be Second, there also remains the possibility of granted on non-concessional (i.e. suffi ciently market failures in the fi nancial sector, including unattractive) terms to increase the incentive for self-fulfi lling trend dynamics in the pricing the country to return to market fi nancing as soon of sovereign risk.
Load more

Recommended publications
  • European Stability Mechanism
    ~FACTSHEET~ European Stability Mechanism The Treaty establishing the European Stability Mechanism (ESM) has been ratified by all 17 euro area member states. It entered into force on 27 September 2012, nine months earlier than initially foreseen 1. The treaty was signed by euro area member states on 2 February 2012. The ESM board of governors held its inaugural meeting on 8 October 2012. The ESM is an intergovernmental institution based in Luxembourg, set up to provide financial assistance to eurozone member states experiencing, or being threatened by, severe financing problems, if this is indispensable for safeguarding financial stability in the euro area as a whole. The initial maximum lending capacity of the ESM is set at €500 billion. This is achieved with subscribed capital of €700 billion (€ 80 billion paid-in capital, the rest callable). A first version of the treaty was signed on 11 July 2011, but it was subsequently modified to incorporate decisions taken by the heads of state and government of the euro area on 21 July and 9 December 2011 to improve the effectiveness of the mechanism. As a permanent mechanism, the ESM will take over the tasks currently fulfilled by the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). With the accelerated entry into force, the ESM will now operate alongside the EFSF for nine months. In March 2012, the Eurogroup agreed to raise the overall ceiling for ESM/EFSF lending to €700 billion 2. Already during the transitional period, until mid-2013, the ESM will be the main instrument for the financing of new programmes.
    [Show full text]
  • What Was He Doing at the Eurogroup?
    Published on Eurointelligence, 10 July 2007. The original version of the article appeared in French in Le Monde. What was he doing at the Eurogroup? Jean Pisani-Ferry By attending the meeting of ministers of the euro area on Monday 9 July Nicolas Sarkozy was above all making a political statement. This was a 'first', after a decade in which heads of state and government of the euro area have been conspicuous by their absence. They have never met in a euro context, not even at the birth of their common currency. Having taken a momentous decision, they promptly left implementation of the euro to financial technicians. By going to the Eurogroup, Nicolas Sarkozy clearly intended to mark the end of this long absence. Beyond the symbolism, however, Europe was curious as to his motives and many are worried. Criticised for a fiscal policy which has departed from the agreed objective, was the President of France seeking the consent of partner countries to this departure? Was he launching an offensive designed to dilute the independence of the European Central Bank? And what is this 'economic government' which all the French leaders are calling for but none has pinned down exactly? Few Frenchmen realise the extent to which the ideas they share may appear odd to their partners. The reason for this is that the euro means different things to different peoples. For some, for example the Netherlands and Austria, it allowed a belated ceding of a sovereignty perceived as existing in name only. They see monetary union as a necessary framework for national economic policy – a little like the gold standard underpinned disciplines in the 19th century without implying political affiliation.
    [Show full text]
  • The Future of Europe the Eurozone and the Next Recession Content
    April 2019 Chief Investment Office GWM Investment Research The future of Europe The Eurozone and the next recession Content 03 Editorial Publication details This report has been prepared by UBS AG and UBS Switzerland AG. Chapter 1: Business cycle Please see important disclaimer and 05 Cyclical position disclosures at the end of the document. 08 Imbalances This report was published on April 9 2019 10 Emerging markets Authors Ricardo Garcia (Editor in chief) Chapter 2: Policy space Jens Anderson Michael Bolliger 14 Institutional framework Kiran Ganesh Matteo Ramenghi 16 Fiscal space Roberto Scholtes Fabio Trussardi 19 Monetary space Dean Turner Thomas Veraguth Thomas Wacker Chapter 3: Impact Contributors Paul Donovan 23 Bond markets Elisabetta Ferrara Tom Flury 26 Banks Bert Jansen Claudia Panseri 29 Euro Achim Peijan Louis Pfau Giovanni Staunovo Themis Themistocleous Appendix Desktop Publishing 32 The evolution of the EU: A timeline Margrit Oppliger 33 Europe in numbers Cover photo 34 2020–2025 stress-test scenario assumptions Gettyimages Printer Neidhart + Schön, Zurich Languages English, German and Italian Contact [email protected] Order or subscribe UBS clients can subscribe to the print version of The future of Europe via their client advisor or the Printed & Branded Products Mailbox: [email protected] Electronic subscription is also available via the Investment Views on the UBS e-banking platform. 2 April 2019 – The future of Europe Editorial “Whatever it takes.” These words of Mario Draghi’s marked the inflection point in the last recession and paved the way to the present economic recovery. But as the euro celebrates its 20th birthday, the world and investors are beset again by recessionary fears, with risks mounting and likely to continue doing so in the coming years.
    [Show full text]
  • Should Poland Join the Euro? an Economic and Political Analysis
    Should Poland Join the Euro? An Economic and Political Analysis Should Poland Join the Euro? An Economic and Political Analysis Graduate Policy Workshop February 2016 Michael Carlson Conor Carroll Iris Chan Geoff Cooper Vanessa Lehner Kelsey Montgomery Duc Tran Table of Contents Acknowledgements ................................................................................................................................ i About the WWS Graduate Policy Workshop ........................................................................................ ii Executive Summary .............................................................................................................................. 1 1 Introduction ................................................................................................................................. 2 2 The Evolution of Polish Thought on Euro Adoption ................................................................. 5 2.1 Pre-EU membership reforms ...................................................................................................................... 5 2.2 After EU Accession ....................................................................................................................................... 5 2.3 Crisis years ...................................................................................................................................................... 6 2.4 Post-crisis assessment ..................................................................................................................................
    [Show full text]
  • Reform of the European Stability Mechanism
    Reform of the European Stability Mechanism The European Stability Mechanism’s (ESM’s) Nevertheless, on 30 November 2020, the Eurogroup agreed to proceed with the reform of the ESM. The reform entails aim is to provide financial assistance to EU a number of new tasks for the ESM and will further develop member states experiencing or threatened the ESM measures and strengthen the role of the ESM in the by severe financial problems. Like its oversight of financial assistance programmes. It also provides for establishing a funding tool to the Single Resolution Fund predecessor, the temporary European (SRF) in the form of a credit line from the ESM to replace Financial Stability Facility (EFSF), the ESM the direct recapitalisation instrument, providing a financial safety net for bank resolutions in the EU, which will help to provides financial assistance, which is granted protect financial stability and is regarded as a step forward to only if it is proven necessary to safeguard the a Banking Union. financial stability of the euro area as a whole At present, according to the current ESM Treaty, the ESM can and of the ESM members. only lend to governments. Therefore, as SRF is a European institution (seated in Luxembourg), the ESM is not permitted To achieve this aim, the ESM relies on several instruments, to lend to the SRF. As a result of reforming the ESM Treaty, including loans within a macroeconomic adjustment financial instruments will be adapted. In particular, the programme, such as the one used by Cyprus, Greece, Ireland precautionary credit line will be made easier to use.
    [Show full text]
  • Chapter 1 the Present and Future of the European Union, Between the Urgent Need for Democracy and Differentiated Integration
    Chapter 1 The present and future of the European Union, between the urgent need for democracy and differentiated integration Mario Telò Introduction The European Union has experienced an unprecedented multi-dimensional and prolonged crisis, a crisis which cannot be understood in isolation from the international context, with major global economic changes to the detriment of the West. Opinions differ as to the overall outcome of the European policies adopted in recent years to tackle the crisis: these policies saved the single currency and allowed for moderate growth, but, combined with many other factors, they exacerbated the crisis of legitimacy. This explains the wave of anti-European sentiment in several Member States and the real danger that the European project will collapse completely. This chapter analyses the contradictory trends at play and examines more closely how to find a way out of this crisis – a way which must be built around the crucial role of the trade union movement, both in tackling Euroscepticism and in relaunching the EU. This drive to strengthen and enhance democracy in the euro area, and to create a stronger European pillar of social rights, will not be successful without new political momentum for the EU led by the most pro-European countries. The argument put forward in this chapter is that this new European project will once again only be possible using a method of differentiated integration. This paper starts with two sections juxtaposing two contradictory sets of data. On the one hand, we see the social and institutional achievements of the past 60 years: despite everything, the EU is the only tool available to the trade union movement which provides any hope of taming and mitigating globalisation (Section 1).
    [Show full text]
  • Monetary and Fiscal Policy Interaction in A
    ARTICLES MONETARY AND FISCAL POLICY INTERACTIONS IN A MONETARY UNION In EMU, responsibility for monetary policy is assigned to the ECB, while fi scal policy remains the remit of each individual EU Member State. The Treaty on the Functioning of the European Union (hereinafter referred to as the “Treaty”), as well as additional provisions on monetary and fi scal policy interactions, aim to safeguard the value of the single currency and lay down requirements for national fi scal policies. The fi nancial crisis has highlighted that threats to fi nancial stability can have a tremendous infl uence on both monetary policy and fi scal policy. In particular, fi nancial instability and weak public fi nances can have a negative impact on each other. This adverse fi nancial-fi scal feedback loop poses severe challenges to monetary policy, as volatile and illiquid sovereign bond markets, as well as a struggling banking system, put the smooth functioning of the monetary policy transmission mechanism at risk. In order to counter the adverse impact of fi scal and fi nancial instability on the monetary policy transmission mechanism, the Eurosystem resorted to a set of non-standard monetary policy measures during the crisis. Several weaknesses in the national fi scal policies and economic governance of EMU have come to light in the course of the crisis. First, the incentives and rules for sound fi scal, fi nancial stability and macroeconomic policies proved to be insuffi cient. Second, the absence of a framework for the prevention, identifi cation and correction of macroeconomic imbalances was a clear fl aw in the EMU framework.
    [Show full text]
  • Notice of Vacancy Seconded National Experts to The
    Form DG.1 (EN) NOTICE OF VACANCY SECONDED NATIONAL EXPERTS TO THE EUROPEAN COMMISSION Post identification: ECFIN-CEF.CPE.02 (DG-DIR-UNIT) Directorate-General: Economic and Financial Affairs (ECFIN) Directorate: ECFIN.EFC.EPC - Secretariat of the Economic and Unit: Financial Committee and of the Economic Policy Committee and Eurogroup/EWG ECFIN.EFC.EPC.02 - Secretariat for the Eurogroup/EWG Head of Unit: Moisés ORELLANA Telephone: +32 2 29 69933 Number of available posts: 1 Category: Administrator (AD) Suggested taking up duty: 3rd quarter 20171 Suggested initial duration: 2 year(s)1 Place of secondment: Brussels Luxembourg Other: ……….. Specificities: With allowances COST-FREE This vacancy notice is also open to the following EFTA countries : Iceland Liechtenstein Norway Switzerland EFTA-EEA In-Kind agreement (Iceland, Liechtenstein, Norway) the following third countries: the following intergovernmental organisations: 1 Nature of the tasks: We are looking for a colleague to join a friendly and challenging work environment in a dynamic team of 10 people. The Seconded National Expert would contribute to the smooth running of the Unit, which serves as the Secretariat for the Eurogroup and the Eurogroup Working Group (EWG). The latter is composed of high-level representatives from Finance Ministries of euro area Member States and has as tasks to keep under review the economic and financial situation of the euro area Member States and to contribute to the preparation of the Eurogroup meetings. The successful candidate will contribute to the efficient preparation of meetings of the Eurogroup and the EWG. She/he will also contribute to the preparation of meetings of ECOFIN Council and the Economic and Financial Committee (EFC), as appropriate.
    [Show full text]
  • Impact of Exports and Imports on USD, EURO, GBP and JPY Exchange Rates in India
    Impact of Exports and Imports on USD, EURO, GBP and JPY Exchange Rates in India Ms.SavinaA Rebello1 1M.E.S College of Arts and Commerce, (India) ABSTRACT The exchange rate has an effect on the trade surplus (or deficit), which in turn affects the exchange rate. Imports and exports may seem like terms that have little bearing on everyday life, but they exert a profound influence on the consumer and the economy. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper. Most of the studies focus on the impact of currency exchange rates on imports and exports of a country. There is a need to study the relationship in a reverse way. There are various factors due to which currency exchange rates fluctuates. One of the important factors is the impact of imports and exports of a country. Therefore this paper studies the impact of Export and Import on USD, EURO, GBP and JPY in India. The monthly exchange value of EURO, POUND, DOLLAR and YEN as well as EXPORT and IMPORT has been used for the study. The data period is from January 2006 to December 2016. The tools used for analysis are Correlation and OLS Regression Model. From the study it is found that there is a positive change in imports and exports on Indian rupees against euro, pound, dollar, and yen. Import of India is having significant impact exchange rates of selected currencies Exports of India is having significant impact on exchange rates of selected currencies.
    [Show full text]
  • A Reality Check on Capital Markets Union
    A REALITY CHECK ON CAPITAL MARKETS UNION ANALYSIS OF THE PROGRESS SO FAR AND THE NEW CMU ACTION PLAN November 2020 By Panagiotis Asimakopoulos and William Wright > This report analyses the development of EU capital markets since the conception of the capital markets union initiative and shows that while steady progress has been made at an overall EU level, growth has been patchy and there is still a lot of work to be done in individual member states INTRODUCTION A reality check on capital markets union This report analyses the progress in capital markets in the EU27 since the launch of the capital markets union project in 2014. At a time when Europe needs bigger and better capital markets more than ever to help support a post-Covid economic recovery, it makes for a sobering reality check. On the one hand, at an overall EU27 level capital markets are heading slowly but steadily in the right direction: broadly speaking, capital markets are growing both in size and depth relative to GDP. But on the other, when you zoom in on the progress at an individual country level, the picture is much less promising. In many cases the gap between those countries with well- developed and those with less-developed capital markets is widening rather than narrowing. At its most basic level, capital markets union is about reducing the reliance of EU companies for their funding on bank lending and reducing the dependence of EU savers for their future financial security on bank deposits. These two measures highlight the dichotomy with CMU.
    [Show full text]
  • A Euro Area Budget: Another Seedling?
    Maastricht Law Faculty of Law 201/0 Maastricht Centre for European Law 201/0 MCEL Working Paper series A Euro area budget: another seedling? Dr. M. van der Sluis* Table of Contents 1. Introduction .............................................................................................................................................. 2 2. Plans for a Euro (Area) budget ................................................................................................................. 4 2.1. The Four and Five Presidents’ reports ............................................................................................ 4 2.2. The European Parliament Resolution ............................................................................................. 4 2.3. The Commission proposals (2018) .................................................................................................. 5 2.4. The Meseberg Declaration & the New Hanseatic League .............................................................. 6 2.5. The Eurogroup agreements on the BICC ........................................................................................ 8 2.6. The Commission proposal (2019) ................................................................................................... 8 2.7. The Eurogroup’s October Term Sheet ............................................................................................ 9 3. Legal aspects of the BICC .......................................................................................................................
    [Show full text]
  • Preparation of Eurogroup and Informal Council of Economics and Finance
    0(02 Brussels, 5 September 2002 3UHSDUDWLRQ RI (XURJURXS DQG ,QIRUPDO &RXQFLO RI (FRQRPLFVDQG)LQDQFH0LQLVWHUV Copenhagen 6-7 September 2002 (Gerassimos Thomas & Jonathan Todd) The EU’s Economics and Finance Ministers will start with a meeting on Friday 6 September at 15.00 hrs. A press conference by the Presidency and the Commission is scheduled at 17.00 hrs. Eurogroup Finance Ministers are due to meet at 17.30 hrs on the same date. A press conference by the Eurogroup President and the Commissioner is scheduled at 19.30 hrs. The informal Ecofin meeting will resume on Saturday with the participation of central bank governors for the whole day. A press conference by the Ecofin President, the responsible Commissioners and the ECB is scheduled for 18.00 hrs. (XURJURXS *7 The Eurogroup will start with an exchange of views on the economic situation and policy stance. This discussion will also serve as an input to the preparation of the upcoming G7 meeting. Commissioner Solbes will inform Ministers about the launch of the excessive deficit procedure for Portugal. The launch of the procedure is automatic according to the Treaty following the release of a 4.1% of GDP deficit figure for 2001. The Commission will propose to Ministers a timetable for the various steps envisaged by the Treaty. Ministers are also expected to discuss the possible budgetary effects of the disastrous floods in August. ,QIRUPDO&RXQFLORI(FRQRPLFVDQG)LQDQFH0LQLVWHUV 6DYLQJVWD[DWLRQ -7 Following a debriefing by Danish Finance Minister Thor Pedersen, the current President of the Council of Finance Ministers, on his meeting with the Swiss President and Minister for Finance Kaspar Villiger on 30 August 2002, Taxation Commissioner Frits Bolkestein will report to Ministers on the progress to date of negotiations with third countries on the taxation of savings and particularly the results of the latest discussions with Switzerland.
    [Show full text]