EU Financial Assistance

With the euro crisis behind us, it is hard to picture the currency union without a rescue mechanism. Almost eight years have passed since the European Stability Mechanism (ESM) was created in September 2012. All states that once benefitted from its financial support have successfully exited their programs. A new round of institutional reform is now in the offing, with the ESM possibly getting ‘beefed up’ to a European Monetary Fund. But the currency union’s set-up has not always had assistance instruments like these at its disposal. At the start of 2010, when the crisis threatened the survival of the euro and the Union as a whole, its toolbox was empty. Or almost empty.

From the European Stability Mechanism to the European Monetary Fund: There and Back Again

In December 2018, the Euro Summit endorsed the Term Sheet on the European Stability Mechanism (ESM) reform prepared by the Eurogroup. In this context, the Euro Summit did not acknowledge the proposal of the European Commission to transform the ESM into the European Monetary Fund (EMF), but simply gave the Eurogroup a mandate to draft the relevant amendments to the ESM Treaty and submit them to the European Council of June 2019. Nonetheless, the justifications for the incorporation of the ESM into the body of the European Treaties continue to be valid and may come back into play. In this respect, it is worth highlighting two flaws that have emerged in the proposed transformation of the ESM into the EMF. First, the ESM Treaty does not contain any rule about extinction and transfer of functions. Second, the Commission’s proposal did not clarify what status the EMF would have enjoyed in the EU legal framework.

State Contingent Debt as Insurance for Euro Area Sovereigns

The authors provide a novel angle to the ongoing discussions by the G20 on sovereign contingent debt and argue that contingent debt could provide market-based insurance to protect the euro area from future debt crises. Risk-sharing with the markets is a practical way forward in the context of the Franco-German debate on risk-sharing among EU member states vs system-wide risk reduction. The financial innovation of contingent debt is a feasible euro area reform that would not introduce risk-sharing between states or require institutional reforms or Treaty changes. However, coordination would be needed. The authors’ suggestion fills a gap in the proposals on the completion of the banking union and the possible establishment of a European Monetary Fund (EMF). These proposals offer institutions-based solutions to crises, with the banking union providing safety regulations that will make banking institutions more resilient, while the EMF will be a ‘fire brigade’ to be called on in emergencies. What has not been tapped are the markets, whose tolerant behaviour to sovereign demands encouraged the build up of debt, while their finicky response exacerbated the crisis.

European Monetary Fund – A Further Step towards Completing the Economic and Monetary Union?

In this paper, the author focused on two areas. First he outlined the development of the financial assistance funds in Europe. Moving from EFSF and EFSM through ESM all the way to EMF was a long path. Will the EMF be a further step towards completing the economic and monetary union of the EU? It is the question the author tried to answer in the first part of the paper. Secondly, the author considered the position the EMF and the financial assistance funds have within the branch of financial law. Mainly, he tried to find answers to the question in which sub-policy within the public financial policy the financial assistance policy of the states (of the EU) belong and whether the public financial funds are rather of fiscal or non-fiscal nature. Having presented possible answers to these questions, the author expressed his hopes to instigate discussion among the financial law scholars on this topic.

An Evolutionary Path Towards a European Monetary Fund

There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF activities, such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The financial resources of the ESM will be required as a backstop only intermittently, in times of great financial market instability. The need for this will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution of the ESM should thus aim at enhancing flexibility in its instruments while clarifying its overall mandate (financial stability), rather than changing the details of the rescue mechanism or its institutional structure. The financial stability function of the ESM should be extended to the central institutions of the Banking Union, with an ultimate backstop for the Single Resolution Fund (SRF). Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.

New Facilities and Institutions

As the crisis evolved, euro-area governments first constructed two transitional financial facilities and then created a permanent fund. This chapter reviews the creation of the financial facilities of the euro area culminating in the establishment of the European Stability Mechanism. The ESM treaty contains a strong presumption, but not a strict legal requirement, that the International Monetary Fund (IMF) will also be involved in assistance to a member state. As a political matter, the Fund’s involvement is strongly favored in creditor countries of the euro area. The emergence of the ESM, a new institutional player in crisis finance, prompted a reconsideration of the institutional arrangements under which crisis programs are designed. The chapter reviews proposals from research institutes and the European Parliament to combine resources of the European Commission and the ESM into a European Monetary Fund.

Introduction

European governments, against their initial instincts, invited the International Monetary Fund to design financial rescue programs during the euro crisis in cooperation with the European Commission and European Central Bank. These institutions, known as the “troika,” constitute a regime complex in the parlance of international political economy. This book poses four questions about the regime complex for crisis finance in the euro area: Why did European governments choose this particular mix of institutions? What was the strategy of key member states in directing several institutions to collaborate on lending programs? Why did this arrangement endure despite severe conflicts among the institutions? Should the member states of the euro area “go it alone” by creating a European Monetary Fund? This chapter elaborates on these questions and provides an overview of the book.