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The European Stability Mechanism (ESM) 20 2.1 the Creation of the ESM Department of Political Science - International Relations European Studies Chair in European Economics The European Stability Mechanism Evaluation and future scenarios of the fireguard of the European Monetary Union Prof. Veronica De Romanis Prof. Mark Thatcher Supervisor Co-Supervisor Andrea Nicastro 634392 Candidate Academic Year 2018/2019 TABLE OF CONTENTS GLOSSARY 4 ABSTRACT 5 1. The European sovereign debt crisis and the first crisis management tools 8 1.1 The 2008 financial shock ....................................................................................................................................... 8 1.2 The Greek crisis and the sovereign debt crisis 2010-2012 .................................................................................... 9 1.2 The first instruments of crisis management in Europe: the EFSM and the EFSF ............................................... 12 1.3 The Irish Economic Adjustment Programme 2010-2013 ..................................................................................... 16 1.4 The Portuguese bailout programme 2011-2014 .................................................................................................. 17 1.5 The Greek second bailout 2012-1014 .................................................................................................................. 19 2. The permanent crisis management instrument of the EMU: the European Stability Mechanism (ESM) 20 2.1 The Creation of the ESM ..................................................................................................................................... 20 2.2 The structure and funding of the ESM ................................................................................................................. 21 2.3 The financial sector adjustment programme of Spain 2012-2013 ....................................................................... 25 2.4 The economic adjustment programme of Cyprus 2013-2016 .............................................................................. 28 2.5 The Greek third bailout programme 2015 – 2018 ............................................................................................... 31 3. Evaluation and criticism of the European Stability Mechanism 35 3.1 Evaluation of ESM interventions ......................................................................................................................... 35 3.1.1 The mission of the EFSF and ESM .............................................................................................................. 36 3.1.2 EFSF/ESM programme outcomes ................................................................................................................ 37 3.2. Criticisms towards the ESM ............................................................................................................................... 41 3.2.1 The austerity measures ................................................................................................................................. 41 3.2.2 The role of the IMF ...................................................................................................................................... 47 3.2.3 The mismanagement of the Greek crisis ...................................................................................................... 50 3.2.4 Accountability and transparency .................................................................................................................. 52 3.2.5 Human rights protection in the decision-making process ............................................................................. 57 3.2.6 ESM independency and the relationship with the Eurogroup ...................................................................... 58 4. Future scenarios for the European Stability Mechanism: the 2018 reform proposal vs. the creations of a European Monetary Fund 60 4.1 Why is it important to understand the future path of the ESM? ........................................................................... 60 4.2 The 2018 ESM reform proposal .......................................................................................................................... 62 4.2.1 ESM as the common backstop of the Single Resolution Fund of the European Banking Union ................. 62 4.2.2 The revision of ESM precautionary credit lines ........................................................................................... 64 2 4.2.3 Debt sustainability and single limb collective action clauses (CACs) ......................................................... 67 4.2.4 The relationship between the ESM and the Commission ............................................................................. 69 4.3 Perplexities about the 2018 ESM reform proposal .............................................................................................. 71 4.3.1 PCCL criteria becoming tighter and the relationship with the OMT programme ........................................ 71 4.3.2 Is the introduction of single-limb CACs an opening to debt restructuring by the ESM? ............................. 74 4.3.3 The incomplete determination of the backstopping nature of the ESM ....................................................... 74 4.4 The European Monetary Fund (EMF) ................................................................................................................. 76 4.4.1 The History of the EMF proposal and the current position of EU protagonists on the project .................... 76 4.4.2 The 2017 EMF Commission proposal and the EMF statute ......................................................................... 80 4.5 Objections on the formalization of the EMF ....................................................................................................... 84 4.5.1 Cross-border debt ......................................................................................................................................... 84 4.4.3.2 Moral Hazard ............................................................................................................................................ 85 4.5.2 The relationship with the EU institutional setting ........................................................................................ 87 4.5.1 The question on the EMF technical staff ...................................................................................................... 88 4.6 The establishment of the EMF as a source of opportunity for a deeper integration of the EMU ........................ 89 4.6.1 The Euro Budget .......................................................................................................................................... 89 4.6.2 The European Capital Market Union ........................................................................................................... 92 4.6.3 The Eurobonds ............................................................................................................................................. 96 FINAL REMARKS 98 REFERENCES 101 SUMMARY 110 3 GLOSSARY BICC Budgetary Instrument for Competitiveness and Convergence BoA Board of Auditors BoD Board of Directors BoG Board of Governors BoP Balance of Payments CAC Collective Active Clause CDU Christian Democrats Party ECB European Central Bank EDP Excessive Deficit Procedure EEC European Economic Community EFSF European Financial Stability Facility EFSI European Fund for Strategic Investments EFSM European Financial Stability Mechanism EIB European Investment Bank EMU Economic and Monetary Union ESM European Stability Mechanism EU European Union GDP Gross Domestic Product GLF Greek Loan Facility HFSF Hellenic Financial Stability Fund IMF International Monetary Fund MFF Multiannual Financial Framework MoU Memorandum of Understanding OMT Outright Monetary Transactions RFA Regional Financing Arrangements SPV Special Purpose Vehicle TEU Treaty on European Union TFEU Treaty on the Functioning of the European Union TSCG Treaty on Stability, Coordination and Governance in the Economic and Monetary Union 4 ABSTRACT After more than 10 years since the failure of the investment bank Lehman Brothers and the burst of the housing bubble in the US, the time is ripe to evaluate how the European Union (EU) economic framework has been influenced by the greatest financial disaster since the Great Depression of 1929. Indeed, the 2008 financial crisis represents the first major shock that the EU has faced since the signing of the Maastricht Treaty and the official establishment of the European Monetary Union (EMU). The scrutiny of how EU institutional representatives and national authorities managed to operate within the boundaries of the EMU economic governance in a period of crisis may be thought as an easy read: indeed, the inaction which characterised the EU after the Lehman Brothers surely represents one of the causes of the eruption of the sovereign debt crisis in 2010, a double-dip crisis peculiar of the European region, and in particular the European currency area. However, the background in which the sovereign debt crisis developed, which coincides with the context of this dissertation, is far more complex: 28 very differentiated states cooperating in several institutions which have to cope with enormous amounts of legislative acts and topics. Furthermore, 19 of those countries opted to share a single currency (the euro) in a monetary union which is not complete yet, since economic and fiscal policies
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