ESM Explanation

ESM European Stability Mechanism

According to phonecations, European Stability Mechanism is a set of instruments intended to guarantee the stability of the European Economic and Monetary Union as a whole. The »Treaty establishing the European Stability Mechanism« wassigned in 2012 by the member states of the Eurozone. The ESM replaced the euro rescue package that was set up for a limited period in May 2010.

The ESM is financed from three sources: € 80 billion are direct deposits made by the member states of the euro area. The member states in turn guarantee a financial volume totaling € 620 billion, and the IMF is participating with a loan amount of € 250 billion. A member state can only receive support from the ESM if the stability of the euro area as a whole is at risk.

On June 29, 2012, the Bundestag approved the ESM and the Fiscal Treaty with a two-thirds majority (Fiscal Compact: 491 for, 111 against, 6 abstentions; ESM: 493 for, 106 against, 5 abstentions). The Federal Council also gave its consent with a two-thirds majority. The two-thirds majority in the Bundestag and Bundesrat was necessary because the fiscal treaty curtailed state sovereignty (provisions of the Basic Law on budget management by the federal and state governments cannot in future be changed at will, other states will be given the opportunity to take legal action against domestic policy decisions on the budget to the European Court of Justice, deficit states will in future be obliged to have their budgets approved by EU institutions). – After the Bundestag and Federal Council approved the ESM and the Fiscal Compact, several plaintiffs or groups of plaintiffs lodged complaints and / or organ charges before the Federal Constitutional Court. The critics complain, inter alia. a curtailment of the budget and control rights of the Bundestag. In a judgment of September 12, 2012, the Federal Constitutional Court approved Germany’s participation in the ESM and the Fiscal Compact with reservations. Thereafter, inter alia Germany’s liability of around € 190 billion cannot be increased without the consent of the German representative in the ESM bodies and it must be ensured that, despite the provisions of the contract on the inviolability of the ESM’s documents and despite the confidentiality of all persons who are professionally active for the ESM, the Bundestag and the Bundestag are fully informed. With this ruling, the Federal Constitutional Court decided on the urgent motions, a decision on the main proceedings is still pending (in this context, the purchase of government bonds by the ECB is also being examined in this context). Since a summary examination of the legal situation has already taken place, it can be assumed that the final judgment essentially confirms the preliminary decision. After the permanent representatives of the Eurozone had ensured in a joint declaration that the conditions of the Federal Constitutional Court were met, Federal President J. Gauck ratified the Treaty on the ESM on September 27, 2012, which came into force on October 8, 2012.

The rating agency Standard & Poor’s had already withdrawn the top rating from the EFSF in January 2012, at the beginning of December 2012 the rating agency Moody’s followed suit and lowered the credit ratings of the EFSF and the ESM by one notch. This step was justified with the downgrading of France, which with a share of 20.3859% is the most important guarantor of the rescue fund after Germany. In mid-July 2013, the rating agency Fitch withdrew the top rating from the EFSF after it had recently downgraded France’s creditworthiness.

In December 2012 the finance ministers agreed on key points for joint banking supervision, in September 2013 the European Parliament approved a corresponding law and in October 2013 the finance ministers finally reached an agreement on the legal basis of supervision. Furthermore, in December 2013 the EU finance ministers agreed on rules for the resolution of banks and the establishment of a resolution fund ( European Banking Union).

In 2012, Spain applied for financial aid from euro area member states to rebuild its banking sector. The country received € 41.3 billion in the form of ESM papers. In 2013, Cyprus received around € 10 billion in support to stabilize the budget and stimulate the economy. The ESM will provide Greece with a total of up to € 86 billion in loan assistance in the years 2015–18.

ESM European Stability Mechanism