EUROPEAN STABILITY MECHANISM GOVERNANCE, ACCOUNTABILITY, AND TRANSPARENCY October 2018 2 | EUROPEAN STABILITY MECHANISM Klaus Regling Managing Director © European Stability Mechanism In today’s world, uncertainty is part of the macroeconomic and financial environment and can adversely affect countries, businesses, and citizens. International institutions play an important role in mitigating this uncertainty by fostering closer cooperation among countries to reduce the risk of future crises and by providing assistance. The establishment of the ESM in October 2012 represents the most visible feature of Europe’s response to the euro area crisis. Our institution is called upon to provide financial support to euro area countries in temporary need of assistance in exchange for important economic and financial sector reforms. The ESM’s corporate structure consists of a Board of Governors composed of the 19 euro area ministers of finance, who are accountable to their national parliaments, and a Board of Directors comprising high-ranking officials appointed by the ministers. This publication describes the ESM’s main corporate governance features. More specifically, it covers the ESM, and its precursor the EFSF, providing information about the institution’s mission, governing bodies, transparency, and accountability arrangements. Today, the European Economic and Monetary Union is stronger in part due to the efforts and achievements of the ESM. The work on building an ever stronger and safer currency union is ongoing, in which the ESM will continue to play an important role. GOVERNANCE, ACCOUNTABILITY, AND TRANSPARENCY | 3 ABOUT THE EUROPEAN STABILITY MECHANISM The European Stability Mechanism (ESM), in op- The organisation and functioning of the ESM are eration since 8 October 2012, is the crisis resolu- set out in the ESM Treaty and By-Laws, which are tion mechanism for countries of the euro area in available to the general public on the ESM website. need of financial assistance. The institution is de- signed to mobilise funding and provide stability The ESM does not finance its loans with taxpayer money. Instead, it borrows the money from finan- support under strict conditionality to the benefit cial markets. It issues bonds covering a full spec- of the euro area countries which are experiencing, trum of maturities, bills, and other funding instru- or are threatened by, severe financing problems, ments. Thanks to its high creditworthiness, the when this is indispensable to safeguard the finan- ESM is able to borrow money from the markets at cial stability of the euro area as a whole and of its much lower interest rates than those charged to fi- members. nancially distressed countries. The ESM is an international financial institution Financial institutional investors, such as commer- based in Luxembourg, which is owned and jointly cial banks, central banks, asset managers, insur- governed by a number of countries. In 2012, the ance companies, pension funds, and sovereign then 17 euro area countries signed the internation- wealth funds, buy the ESM’s debt issues. These in- al treaty establishing the ESM. After Latvia (in 2014) vestors regard ESM securities as safe investments, and Lithuania (in 2015) adopted the euro, the ESM’s thanks to the ESM’s high credit rating which is membership grew to 19. based on its strong capital structure. ESM Board of Governors in 2012 ©European Stability Mechanism 4 | EUROPEAN STABILITY MECHANISM ESM shareholders Euro area member states Other EU Member States The ESM currently has 19 Members. All euro area needed. The financial contribution of each ESM Mem- member states are obliged to join the ESM. ber to the ESM capital is based on the capital key of the European Central Bank. It reflects the respective After a country adopts the euro, its government ap- country’s share of the total population and gross do- plies to join the ESM. The technical terms, including mestic product of the euro area. the country’s capital share, are agreed. Then the ESM Board of Governors approves the application, and the The ESM Members’ contribution key, corresponding new ESM Member ratifies the ESM Treaty. This usually capital subscription, and amount of paid-in capital as takes place about one-to-two months after the coun- of 31 December 2017, are as follows: try adopts the euro as its currency. ESM CONTRIBU- SUB- PAID-IN New ESM Members are not required to join the ESM’s MEMBERS TION KEY SCRIBED CAPITAL predecessor, the European Financial Stability Facility (%) CAPITAL (€ BILLION) (€ BILLION) (EFSF). Belgium 3.4534 24.34 2.78 Germany 26.9616 190.02 21.72 Estonia 0.1847 1.30 0.15 Capital structure Ireland 1.5814 11.15 1.27 Greece 2.7975 19.72 2.25 ESM Members make a contribution to the ESM’s paid- Spain 11.8227 83.33 9.52 in capital, which is invested conservatively in high- France 20.2471 142.70 16.31 quality assets. The paid-in capital underpins the fi- Italy 17.7917 125.40 14.33 nancial strength and high creditworthiness of the ESM Cyprus 0.1949 1.37 0.16 as an issuer. The ESM currently has the most paid-in Latvia 0.2746 1.94 0.18 capital of any international financial institution. Lithuania 0.4063 2.86 0.20 Luxembourg 0.2487 1.75 0.20 The 17 founding ESM Members completed their paid- Malta 0.0726 0.51 0.06 in capital payments in April 2014. New joiners Latvia Netherlands 5.6781 40.02 4.57 and Lithuania began their payments in 2014 and 2015 Austria 2.7644 19.48 2.23 and are expected to complete them in 2026 and 2027, 2.4921 17.56 2.01 respectively. Portugal Slovakia 0.8184 5.77 0.66 Paid-in capital is the portion of the ESM’s total capi- Slovenia 0.4247 2.99 0.34 tal paid in by ESM Members. The other portion of the Finland 1.7852 12.58 1.44 ESM’s capital is committed but will only be called if Total 100 704.80 80.37 GOVERNANCE, ACCOUNTABILITY, AND TRANSPARENCY | 5 ESM Members’ contributions are invested and nev- Shareholder relations er used for lending. The ESM may require its Members to make a capital The ESM highly values shareholder relations and payment. In other words, it may call capital which engagement. The ESM participates in various politi- has been committed and is part of the ESM’s total cal forums where its Members discuss matters of 1 capital. Such a capital call could be made in three relevance to its mandate, such as the Eurogroup , 2 specific situations only: the Eurogroup Working Group , and the Task Force for Coordinated Action3. • when the Board of Governors so decides by mu- tual agreement; In addition, each year the ESM organises a Share- holders’ Day during which the ESM welcomes • to cover losses; or representatives from the finance ministries of the ESM Members, the European Commission, and the • to avoid default on an ESM payment obligation to European Central Bank for a mutual exchange of its creditors. views. The ESM also maintains a dedicated online shareholder relations platform – the ESM Board The total amount of callable capital is €624.3 billion. Portal, which allows for communication with the To date, ESM has never needed to call this capital. ESM shareholders via a secure online interface. The ESM welcomed representatives from the finance ministries of ESM Members at its annual Shareholders’ Day in 2017 (left) and in 2016 (right) ©European Stability Mechanism 1 The Eurogroup is an informal body where the finance ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro. 2 The Eurogroup Working Group (EWG) is composed of high-level representatives from finance ministries of euro area member states. It reviews the economic and financial situation of the euro area member states and contributes to the preparation of the Eurogroup meetings. 3 The Task Force for Coordinated Action is a working group of the EWG where technical experts from finance ministries of euro area member states discuss and review policy issues pertaining to the Eurogroup and the EWG. 6 | EUROPEAN STABILITY MECHANISM 94 | EUROPEAN STABILITY MECHANISM GOVERNANCE OF THE ESM Members of the Board of Governors The Board of Governors is the highest deci- sion-making body of the ESM. It comprises government representatives from each of the Board of Governors 19 ESM Members with the responsibility for finance. Representatives from the European Commission and the European Central Bank may participate in its meeting as observers. NETHERLANDS ESTONIA The ESM statutory bodies foreseen in the ESM elect a Chairperson and a Vice-Chairperson from Sven Sester, Jeroen Dijsselbloem, among its members. Portuguese finance minister Treaty are the Board of Governors and Ministerthe of Board Finance, of Chairman of the Board of Governors, Governor since 9 April 2015, Mário Centeno assumed the role of Chairperson on Directors.Minister of Finance, The Managing Director is the legal repre- replacing Maris Lauri, Governor since 27 September 2012 sentative of the ESM and chairs the meetingsGovernor since 3 Novemberof the 2014 13 January 2018, succeeding former Dutch finance Board of Directors. In addition, the ESM has a Board minister Jeroen Dijsselbloem, who had held the po- BELGIUM IRELAND of Auditors which is an independent oversight body. sition since 2012. Johan Van Overtveldt, Michael Noonan, Minister of Finance, Minister of Finance, The GovernorsGovernor since 15 December are 2014 ministers designatedGovernor by each since 27 September ESM 2012 The Board of Governors meets at least once a year Member to represent it on the ESM Board of Gover- and whenever the affairs of the ESM so require. The annual meeting of the Board of Governors takes nors.