Agreement on Euro Rescue Fund ESM

Mona Hetzel
December 1, 2020

Agreement on Euro Rescue Fund ESM

EU finance ministers agreed on Monday evening during a video conference on the reform of the Euro Rescue Fund ESM. This had originally been planned for last December and was not considered controversial - but then the project fell into the mills of Italian domestic politics, so that Rome could no longer agree. But now Italy's finance minister Roberto Gualtieri seems to be in a position to give his placet. Federal Finance Minister Olaf Scholz (SPD) said that the agreement "strengthens the euro and the entire European banking sector". The decision sounds very technical, he said, but is of great political importance.

The fund should also play a role in fighting the economic consequences of the pandemic. In April, the euro finance ministers agreed that the ESM can provide states with the common currency with precautionary credit lines to cover the additional corona costs in the health sector. Countries can reserve loans for this purpose worth up to two percent of their economic output, which would add up to a maximum of 240 billion euros. So far, however, no government has used this option.

The European State Mechanism, founded in 2012, and serves the purpose of helping Euro countries with emergency loans if they have problems finding buyers for their bonds on the financial market.  Greece, Cyprus, Portugal, Spain and Ireland have so far benefited from this rescue package, which is headed by Klaus Regling from Germany. The restructuring should now strengthen the fund: it should have more influence on which reforms governments commit themselves to in return for the cash injections. This would make the ESM more similar to the International Monetary Fund from Washington. In addition, debt cuts are to be made easier. With such a cut, creditors of bankrupt states would waive parts of their claims. The agreement also envisages making it easier for the ESM to provide precautionary credit lines.

It is also important that the ESM will take on the task of reinsuring the European bank settlement fund SRF, which was founded in 2014: If the Single Resolution Fund runs out of money in a banking crisis, the ESM will step in. In fact, this emergency cover will now start at the beginning of 2022, two years earlier than originally planned. The prerequisite for such an advance was that Europe's banks make progress in reducing risks and bad loans - and this has been done.

The governments of the 19 countries with the common currency are now expected to sign the amended ESM Treaty in January. After that, the national parliaments, including the Bundestag, must approve it. This could take another year. The fund has a total of 705 billion euros in capital. But the 19 euro states have only paid in 80.5 billion euros of this - for the rest they merely guarantee. Germany, the largest economy, accounts for 21.7 billion euros in paid-in capital plus 168.3 billion euros in callable capital. These lavish guarantees allow the ESM to take out loans at very favourable terms and pass them on to euro countries in crisis.

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