European Stability Mechanism (ESM)
The European Stability Mechanism (ESM) is an international financial institution set up by the euro area countries to provide financial assistance to its members where this is indispensable to safeguard financial stability.
The cornerstone of the European firewall, the ESM is the main instrument to assist euro area countries that encounter difficulties in accessing market financing. Assistance is provided under strict conditionality.
All euro area member states are members of the ESM, which has its headquarters in Luxembourg.
The Governors of the ESM are the finance ministers of the euro area countries, who are also members of the Eurogroup. The Board of Governors is chaired by the President of the Eurogroup.
The Eurogroup members launched the ESM on 8 October 2012.
How does the European Stability Mechanism work?
The ESM has a wide range of tools available to it. It can
- grant loans to its members
- provide precautionary financial assistance
- purchase bonds of beneficiary member states in primary and secondary markets
- finance recapitalisation of financial institutions through loans to governments.
Maximum lending capacity
The ESM's maximum lending capacity is set at €500 billion. This is achieved with a total capital of €700 billion. Of this, €80 billion will be paid in (in full by 2014) and the rest will be callable capital.
In order to raise funds, the ESM can issue financial instruments or enter into agreements with its members, financial institutions or other parties.
The most important decisions, including on the granting of financial assistance and the conditions attached, are taken by the Board of Governors by mutual agreement.
Its legal basis is the Treaty establishing the ESM, which was signed on 2 February 2012 and which has been ratified by all 17 euro area countries.
The political decision to establish a permanent mechanism was taken by heads of state or government meeting at the European Council on 28 and 29 October 2010. A reference to this mechanism, established by the euro area countries, has also been added to article 136 of the Lisbon Treaty.
Relationship with the European Financial Stability Facility (EFSF)
While the ESM is now the main instrument to finance new support programmes, its predecessor, the temporary European Financial Stability Facility (EFSF), will continue to operate alongside the ESM until the existing EFSF programmes are completed.
Link with the Treaty on Stability, Coordination and Governance
From March 2013, any granting of new financial assistance under the ESM will be conditional on ratification of the Treaty on Stability, Coordination and Governance (fiscal compact) by the beneficiary. From 1 January 2014, it will also be contingent on the implementation of a balanced budget rule.