Special analysis November 2012 European Stability Mechanism Tomáš Kozelský EU Office of Česká spořitelna EU OFFICE Česká spořitelna, a.s. Olbrachtova 1929/62 140 00 Praha 4 tel.: +420 956 718 012 fax: +420 224 641 301 [email protected] Ehttp://www.csas.cz/euU OFFICE Č eská spořitelna, a.s. OJanlbra Jedličkachtova 1929/62 +420 956 718 014 [email protected] 00 Praha 4 te l.: +420 261 073 019 Iva Dlouhá fa+420x: + 495620 271861 015073 004 [email protected] [email protected] E [email protected] Helena Chamerová +420 956 718 012 [email protected] Zahradník + 420 261 073 019 Tomáš Kozelský +420 956 718 013 [email protected] Jan Jedlička +420 261 073 484 EUROPEAN STABILITY MECHANISM NOVEMBER 2012 Introduction The European Stability Mechanism (ESM) is a permanent financial assistance crisis mechanism for states belonging to the Eurozone. The ESM is intended to provide stabilisation support for member states that are experiencing or are directly threatened by serious financial problems via a series of financial tools. The Eurozone states belonging to the European Stabilisation Mechanism are Belgium, Estonia, France, Finland, Italy, Ireland, Cyprus, Luxembourg, Malta, Portugal, Austria, Greece, Slovakia, Slovenia and Spain. At the meeting of the European Council held on the 28th and 29th of October 2010, heads of state and heads of government agreed on the need to implement a permanent crisis mechanism for ensuring the financial stability of the Eurozone as a whole. This mechanism replaces the package of European stabilisation measures introduced in May 2010 providing financial aid to EU member states experiencing difficulties and thus protecting the financial stability of the EU against strong market forces on state bond markets in the Eurozone. This rescue method consists of theEuropean Financial Stabilisation Mechanism (EFSM) and theEuropean Financial Stability Facility (EFSF). EFSM The European Financial Stability Mechanism was created by Council Regulation (EU) No. 407/2010 of 11 May 2010 in reaction to the deepening debt crisis in the Eurozone by an agreement among all EU member states, including the Czech Republic. The EFSM authorises the European Commission to mobilise financial resources through issuing of bonds that are guaranteed by the EU budget. EFSF The European Financial Stability Facility, or Euroval, was established on May 9, 2010, by a decision by 16 member states of the Eurozone. The EFSF is seated in Luxembourg and serves as an independent financial institution that obtains resources through issuance of obligations and other debt instruments on the capital market, which are guaranteed by Eurozone states based on an agreed mechanism. There are multiple ways to use these resources for temporary financial assistance to those Eurozone states that end up in financial difficulties. The EFSF was conceived as a temporary rescue mechanism, similar to the EFSM, the functioning of which is intended to be taken over by the European Stability Mechanism. Eurozone states in ESM On December 16 and 17, 2010, the European Council decided on a change to the Treaty on the Functioning of the EU for implementing a single permanent mechanism for ensuring the financial stability of the Eurozone. A new paragraph 3 was added to Article 136 of the Treaty, which states that member states whose currency is the euro may introduce a stability mechanism that will be activated in situations when necessary to ensure the stability of the Eurozone as a whole and adds that provision of any required financial assistance as part of this mechanism will be subject to strict conditions. PAGE 2 OF 8 EU OFFICE ČS, E-MAIL: [email protected], TEL.: +420 956 718 012 EUROPEAN STABILITY MECHANISM NOVEMBER 2012 Bodies of ESM (administration and management) General Director The General Director of the European Stabilisation Mechanism is appointed by the Board of Governors for a 5 - year term. The current and also the first General Director is Klaus Regling. From 2001 to 2008 he served as General Director for Economic and Financial Matters in the European Commission. He has also been the head of the EFSF since its creation in July 2010. The ESM is seated in Luxembourg, like the EFSF. Board of Governors The supreme decision body of the ESM is the Board of Governors, and individual members appoint the governor and his/her representatives. Finance ministers from Eurozone states convene Board meetings. They also elect its chairperson. The Board of Governors adopts the most important decisions based on mutual agreement. These include decisions regarding: . providing financial aid, . conditions for providing such assistance, . the credit capacity of the ESM, . changes in usable instruments. The Board of Governors adopts other decisions by a qualified majority, which is set as 80% of votes, unless otherwise specified. The European Commissioner for Economic and Monetary Matters and the head of the European Central Bank serve as observers. Administrative Board The ESM also has an Administrative Board, to which each Eurozone state appoints one regular member and one substitute member, both of whom have high professional qualifications related to economic and financial matters. This board is presided over by the General Director responsible for everyday running of the ESM. The Commission and the ECB nominate an observer and his/her substitute to the Administrative Board. The Board of Governors assigns specific tasks to the Administrative Board. The Administrative Board adopts decisions by a qualified majority, which is set as 80% of votes, unless otherwise specified. The weight of the votes in the Board of Governors and the Administrative Board is proportional to the individual member states' shares of the ESM's subscribed capital. PAGE 3 OF 8 EU OFFICE ČS, E-MAIL: [email protected], TEL.: +420 956 718 012 EUROPEAN STABILITY MECHANISM NOVEMBER 2012 How time passed with ESM In relation to the report of the working group for administration of economic matters, heads of state and heads of government at the European Council meeting held on from the 28th to the 29th of October 2010, agreed on the need to implement a permanent crisis mechanism for ensuring the financial stability of the Eurozone as a whole. They called on the chairman of the European Council to begin consultations with members of the European Council regarding limitation of adjustments to the Treaty on the Functioning of the European Union, or the Maastricht Treaty, which would need to be carried out for this purpose. The European Council returned to this matter at its meeting held on the 16th and 17th of December 2010 and agreed that the Treaty should be amended so that Eurozone members could implement the the ESM and agreed that for ensuring the financial stability of the Eurozone, Article 122 paragraph 2 of the Treaty, which is primarily intended for providing financial aid to EU member states affected by natural disasters and other extraordinary events beyond their control, would not be used. In the future, the ESM is expected to replace the temporary EFSF and EFSM, which shall remain valid until June 2013. After June 2013, these mechanisms will continue to function only for administration and settlement of previous loans. EU member states that are not members of the Eurozone will be able to participate in ESM financial operations on a bilateral basis. The European Council decided on the wording of the Council decision that amended Article 136 of the Treaty on the Functioning of the EU, as far as a stability mechanism for member states paying with the euros is concerned. The decision was formally adopted by the European Council at its meeting held on the 24th and 25th of March 2011 in Brussels. It was adopted unanimously following consultations with the European Parliament, the Commission and the European Central Bank. The member states definitively agreed on the contents of the ESM at the political level already on March 21, 2011. On July 11, 2011, the finance ministers from all 17 Eurozone countries signed an agreement on establishment of the European Stabilisation Mechanism. Nonetheless, the wording of this agreement was modified to include changes focused on improving the efficiency of the mechanism. The agreement was signed again in Brussels on February 2, 2012. Germany was the last of the 17 Eurozone states to complete ratification of the ESM. The ratification was delayed in Germany due to a complaint lodged with the Constitutional Court by several legislators. The court gave the green light for establishment of the fund on September 12, but ruled that he government would have to fulfil certain conditions. In accordance with this decision, the government decided that the German Parliament could veto any increase in Germany's contribution to the fun, which is supposed to have available 700 billion euros. Germany's contribution is currently 190 billion euros. On September 26, 2012, Germany eliminated the last obstacle to completing the ratification of the ESM rescue fund for the Eurozone. Chancellor Angela Merkel's government approved a declaration, which ensured the fulfilment of guarantees required by the federal constitutional court. The ESM agreement became valid on September 27, 2012, and the ESM was ceremoniously launched on October 8, 2012, following its ratification by all 17 Eurozone states. The Czech government has also commented regarding the establishment of the ESM. After several delays, the Czech Senate approved the creation of the Eurozone rescue fund on April 25, 2012. The measure required only 38 votes for approval in the Senate, but a total of 49 senators across the political spectrum voted in favour of it. The proposal still had to make it through the lower house of parliament, which following several delays approved the creation of the rescue fund on June 5, 2012. A constitutional three-fifths majority of votes from lawmakers was needed in both houses of parliament for approval of the fund, since its creation amends the EU's founding agreements.