European Stability Mechanism (agreed by the European Council)
On 17 December 2010, the European Council agreed that the Treaty of Lisbon should be amended in order for a permanent mechanism to be established by the Member States of the euro area to safeguard the financial stability of the euro area as whole (European Stability Mechanism). This mechanism will replace the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM), which will remain in force until June 2013. As this mechanism is designed to safeguard the financial stability of the euro area as whole, the European Council agreed that Article 122 § 2 of the Treaty on the functioning of the EU (TFEU) will no longer be needed for such purposes. Heads of State or Government therefore agreed that it should not be used for such purposes.
The European Council agreed on the text of the draft decision amending the TFEU set out in annex I. It decided to immediately launch the simplified revision procedure provided for in Article 48 § 6 of the treaty on the European Union (TEU). The consultation of the institutions concerned should be concluded on time to allow the formal adoption of the decision in March 2011, completion of national approval procedures by the end of 2012, and entry into force on 1 January 2013.
The European Council also called for Finance Ministers of the euro area and the Commission to finalise work on the intergovernmental arrangement setting up the future mechanism by March 2011, integrating the general features set out in the Eurogroup statement of 28 November 2010, which the European Council endorsed (annex II). The mechanism will be activated by mutual agreement of the euro area Member States in case of risk to the stability of the euro area as a whole.
Member States whose currency is not the euro will, if they so wish, be involved in this work. They may decide to participate in operations conducted by the mechanism on an ad hoc basis.
The European Council called for the acceleration of the work on the six legislative proposals on economic governance, building on the recommendations of the Task Force endorsed in October 2010 and keeping a high level of ambition, so that they can be adopted by June 2011. It welcomed the Council's report on the treatment of systemic pension reform under the Stability and Growth Pact and called for the report to be reflected in the specifications on the implementation of the reformed SGP.
Recalling its conclusions of October 2010, the European Council looked forward to the Commission's intention to make proposals for the new multiannual financial framework by June 2011 and invited the institutions to cooperate in order to facilitate its timely adoption.
The new Europe 2020 strategy for jobs and growth will continue to guide the Union and the Member States in responding to the crisis and promoting the delivery of structural reforms. The European Council welcomed the progress achieved since the launch of the strategy, as shown in the report presented by the Presidency.
The European Council also welcomed the Statement by the Heads of State or Government of the euro area and the EU institutions (annex III).
DRAFT EUROPEAN COUNCIL DECISION
amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro
THE EUROPEAN COUNCIL,
Having regard to the Treaty on European Union, and in particular Article 48(6) thereof …
(1) Article 48 § 6 of the Treaty on European Union (TEU) allows the European Council, acting by unanimity after consulting the European Parliament, the Commission and, in certain cases, the European Central Bank, to adopt a decision amending all or part of the provisions of Part Three of the Treaty on the Functioning of the European Union (TFEU). Such a decision may not increase the competences conferred on the Union in the Treaties and its entry into force is conditional upon its subsequent approval by the Member States in accordance with their respective constitutional requirements.
(2) At the meeting of the European Council of 28 and 29 October 2010, the Heads of State or Government agreed on the need for Member States to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole and invited the President of the European Council to undertake consultations with the members of the European Council on a limited treaty change required to that effect.
(3) On 16 December 2010, the Belgian Government submitted, in accordance with Article 48(6), first subparagraph, of the TEU, a proposal for revising Article 136 of the TFEU by adding a paragraph under which the Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole and stating that the granting of any required financial assistance under the mechanism will be made subject to strict conditionality. At the same time, the European Council adopted conclusions about the future stability mechanism (paragraphs 1 to 4).
(4) The stability mechanism will provide the necessary tool for dealing with such cases of risk to the financial stability of the euro area as a whole as have been experienced in 2010, and hence help preserve the economic and financial stability of the Union itself. At its meeting of 16 and 17 December 2010, the European Council agreed that, as this mechanism is designed to safeguard the financial stability of the euro area as whole, Article 122(2) of the TFEU will no longer be needed for such purposes. The Heads of State or Government therefore agreed that it should not be used for such purposes.
(5) On 16 December 2010, the European Council decided to consult, in accordance with Article 48(6), second subparagraph, of the TEU, the European Parliament and the Commission, on the proposal. It also decided to consult the European Central Bank. [On […dates…], the European Parliament, the Commission and the European Central Bank, respectively, adopted opinions on the proposal.]
(6) The amendment concerns a provision contained in Part Three of the TFEU and it does not increase the competences conferred on the Union in the Treaties,
HAS ADOPTED THIS DECISION:
The following paragraph shall be added to Article 136 of the Treaty on the Functioning of the European Union:
"3. The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality."
Member States shall notify the Secretary-General of the Council without delay of the completion of the procedures for the approval of this Decision in accordance with their respective constitutional requirements.
This Decision shall enter into force on 1 January 2013, provided that all the notifications referred to in the first paragraph have been received, or, failing that, on the first day of the month following receipt of the last of the notifications referred to in the first paragraph.
This Decision shall be published in the Official Journal of the European Union.
GENERAL FEATURES OF THE FUTURE MECHANISM
(EUROGROUP STATEMENT OF 28 NOVEMBER 2010)
"The recent events have demonstrated that financial distress in one Member State can rapidly threaten macro-financial stability of the EU as a whole through various contagion channels. This is particularly true for the euro area where the economies, and the financial sectors in particular, are closely intertwined.
Throughout the current crisis, euro area Member States have demonstrated their determination to take decisive and coordinated action to safeguard financial stability in the euro area as a whole, if needed and return growth to a sustainable path.
In particular, the European Financial Stability Facility (EFSF) has been set up to provide for swift and effective liquidity assistance, together with the European Financial Stabilisation Mechanism (EFSM) and the International Monetary Fund, and on the basis of stringent programmes of economic and fiscal policy adjustments to be implemented by the affected Member State and ensuring debt sustainability.
On 28 - 29 October the European Council agreed on the need to set up a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole. Eurogroup Ministers agreed that this European Stability Mechanism (ESM) will be based on the European Financial Stability Facility capable of providing financial assistance packages to euro area Member States under strict conditionality functioning according to the rules of the current EFSF.
The ESM will complement the new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers' money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan.
Assistance provided to a euro area Member State will be based on a stringent programme of economic and fiscal adjustment and on a rigorous debt sustainability analysis conducted by the European Commission and the IMF, in liaison with the ECB.
On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.
For countries considered solvent, on the basis of the debt sustainability analysis conducted by the Commission and the IMF, in liaison with the ECB, the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a country would appear to be insolvent, the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability. If debt sustainability can be reached through these measures, the ESM may provide liquidity assistance.
In order to facilitate this process, standardized and identical collective action clauses (CACs) will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro area government bonds starting in June 2013. Those CACs would be consistent with those common under UK and US law after the G10 report on CACs, including aggregation clauses allowing all debt securities issued by a Member State to be considered together in negotiations. This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut) in the event that the debtor is unable to pay.
Member States will strive to lengthen the maturities of their new bond emissions in the medium-term to avoid refinancing peaks.
The overall effectiveness of this framework will be evaluated in 2016 by the Commission, in liaison with the ECB.
We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013.
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA AND THE EU INSTITUTIONS
The Heads of State or Government of the euro area and the EU institutions have made it clear, as set out below, that they stand ready to do whatever is required to ensure the stability of the euro area as a whole. The euro is and will remain a central part of European integration. In particular, the Heads called for determined action in the following areas:
a. Fully implementing existing programmes: we welcome the impressive progress made in implementing the Greek programme and the agreed adjustment programme for Ireland, including the adoption of the 2011 budget.
b. Keeping up fiscal responsibility: we are all committed to strictly implementing the budgetary policy recommendations, fully respecting the fiscal targets for 2010 and 2011 and to correcting excessive deficits within the agreed deadlines.
c. Stepping up growth enhancing structural reforms: we are determined to accelerate structural reforms to enhance growth.
d. Strengthening the Stability and Growth Pact and implementing a new macro-surveillance framework from summer 2011.
e. Ensuring the availability of adequate financial support through the EFSF pending the entry into force of the permanent mechanism: we note that only a very limited amount has been committed from the EFSF to support the Irish programme.
f. Further strengthening of the financial system both as regards the regulatory and supervisory frameworks and conducting new stress tests in the banking sector.
g. Expressing full support to ECB action: we support the ECB in its independent responsibility to ensure price stability, solidly anchor inflation expectations and thereby contribute to financial stability of the euro area. We are committed to ensuring the financial independence of the central banks of the Eurosystem.
Elements of this strategy will be further developed in the coming months as a comprehensive response to any challenges, as part of our new economic governance.
Discuss this theme
- 31 December 2010
This ''Mechanism'' looks like a permanent European Financial Stability Fund (the existing one until 2013). So, it is nothing new and it is not likely to solve the current and future problems of peripheral countries of the Eurozone. In fact, the new Mechanism will only be used to bailout governments, and this only at punitive interest rates. Moreover, it will require seniority for itself and will be able to provide assistance only if the country passes a rigorous debt sustainability analysis conducted by the European Commission and the IMF, in liaison with the ECB. I therefore doubt that the Mechanism will delight investors.
- 3 January 2011
This mechanism is certainly a necessary addition to the Eurozone’s institutional architecture, enhancing its credibility and reducing public resentment in Germany towards conditional aid to other member states. But it leaves several open questions, including what happens to the precarious financial position of Greece, Portugal, Spain and other Eurozone countries in the brink of bankruptcy. The markets will still be attacking these countries. Their problems will not solved by the ESM, if and when it comes into being.
- 5 January 2011
The European Parliament criticises the piecemeal intergovernmental approach used so far to combat the eurozone's debt crisis and demands to take part in the drafting of the rules that will govern the permanent ESM, since part of the guarantees that are to support the mechanism will come from the EU budget, which is co-decided by the Parliament and the Council.
- 7 January 2011
Without Eurobond issues, countries like Greece, Portugal and Spain are going to pay extravagant interests to borrow from the markets. So, this European mechanism is no help to them.
- 10 January 2011
Les compromis et les demi-mesures où ils aboutissent ne peuvent sortir l'Europe de la crise. Il faut une vraie gouvernance économique de l'Union européenne et nos dirigeants doivent comprendre que pour calmer les spéculateurs et autres ennemis de l'euro, ils doivent aller de l'avant et céder encore un peu de souveraineté nationale et donc encore un peu leur amour pour le pouvoir.
- 14 January 2011
Eurobonds are of course the answer to the eurozone's troubles; but the Germans don't want them because they will have to borrow at higher interest rates than they actually do. We will see in the coming weeks what new half measure will prevail.
- 18 January 2011
Επιτέλους, ο Κος Μπαρόζο αποφάσισε να τα βάλλει με την Κα Μέρκελ, ασφαλώς γιατί η πατρίδα του είναι τώρα στο στόχαστρο των κερδοσκόπων. Να δούμε αν θα καταφέρει να πείσει τον τοιούτο της Κας Μέρκελ!