European Financial Stabilisation Mechanism
27 November 2012by eub2 -- last modified 27 November 2012
The European Financial Stabilisation Mechanism (EFSM) provides financial assistance to EU Member States who find themselves in financial difficulties.
The European Financial Stabilisation Mechanism (EFSM) essentially reproduces for the EU 27 the basic mechanics of the existing Balance of Payments Regulation for non-euro area Member States. Under EFSM, the Commission is allowed to borrow up to a total of EUR 60 billion in financial markets on behalf of the Union under an implicit EU budget guarantee. The Commission then on-lends the proceeds to the beneficiary Member State. This particular lending arrangement implies that there is no debt-servicing cost for the Union. All interest and loan principal is repaid by the beneficiary Member State via the Commission. The EU budget guarantees the repayment of the bonds through a p.m. line in case of default by the borrower.
The EFSM has been activated for Ireland and Portugal, for a total amount up to EUR 48.5 billion (up to EUR 22.5 billion for Ireland and up to €26 billion for Portugal), to be disbursed over 3 years (2011 - 2013).
The EFSM is a part of the wider safety net. Alongside the EFSM, the European Financial Stability Facility (EFSF), i.e. funds guaranteed by the eurozone Member States, and funding from the International Monetary Fund (IMF) are available for euro area Member States. Non-euro area Member States are also eligible for assistance under the Balance of Payments Regulation. The EFSM and the EFSF can only be activated after a request for financial assistance has been made by the concerned Member State and a macroeconomic adjustment programme, incorporating strict conditionality, has been agreed with the Commission, in liaison with the European Central Bank (ECB).
On 8 October 2012, a new permanent crisis mechanism, the European Stability Mechanism (ESM), was inaugurated. Its main features build on the existing EFSF. The ESM complements the new framework for reinforced economic surveillance in the EU. This new framework, which includes in particular a stronger focus on debt sustainability and more effective enforcement measures, focuses on prevention and will substantially reduce the probability of a crisis emerging in the future.
Further information:
Legal base
Scope
The EFSM provides assistance to Member States where:
- a Member State is experiencing, or is seriously threatened with, a severe financial disturbance;
- the financial disturbance or threat of financial disturbance is due to events beyond the control of the Member State concerned.
Financial assistance
Financial assistance by the EFSM may take the form of a loan or credit line granted to Member States. A credit line is an authorisation given to a Member State to draw funds up to a specified ceiling for a given period of time.
Procedure
Before it can benefit from the EFSM, a Member State shall submit a request comprising:
- an assessment of its financial needs;
- an economic and financial adjustment programme describing the various measures to be taken to restore financial stability.
The Council then decides whether to grant financial assistance to the Member State. It shall act by a qualified majority on a proposal from the Commission. If the Council decides to grant financial assistance to the Member State, its decision contains:
- the procedures for the financial assistance, such as the amount, the number of payments, the availability period of the financial assistance, etc.;
- the general economic policy conditions: these conditions are established by the Commission. They are attached to the EU financial assistance with a view to re-establishing a sound economic situation in the Member State concerned and to restoring its capacity to finance itself on the financial markets;
- the economic and financial adjustment programme of the Member State.
Moreover, the general economic policy conditions are the subject of a Memorandum of Understanding between the Member State and the Commission. The Commission then re-examines compliance with these conditions regularly in collaboration with the European Central Bank. Any changes to these conditions may result in an adjustment of the economic and financial adjustment programme of the Member State.
Granting of financial assistance
The disbursement of loans or the opening of credit lines granted to Member States is managed by the Commission. The latter then verifies at regular intervals whether the economic policy of the beneficiary Member State accords with its adjustment programme.
The Commission is also authorised to borrow on the capital markets or from financial institutions in order to finance the loans granted to Member States.
Moreover, the Court of Auditors has the right to carry out financial controls and audits in order to verify the legality of financial assistance granted by the EU.
Compatibility with other mechanisms providing financial assistance
The EFSM is compatible with the facility providing medium-term financial assistance for balances of payments. This financial assistance is for Member States which have not adopted the euro and are experiencing difficulties in their balance of payments.
The EFSM also does not exclude recourse to financing outside the EU, in particular by the International Monetary Fund. In that case the Commission examines whether the EFSM is compatible with the outside financing.
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