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Procedure : 2010/0821(NLE)
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Document selected : A7-0052/2011

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A7-0052/2011

Debates :

PV 09/03/2011 - 7
CRE 09/03/2011 - 7

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PV 23/03/2011 - 13.1
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P7_TA(2011)0103

Texts adopted
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Wednesday, 23 March 2011 - Brussels Final edition
Amendment of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro *
P7_TA(2011)0103A7-0052/2011
Resolution
 Annex
 Annex
 Annex

European Parliament resolution of 23 March 2011 on the draft European Council decision amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro (00033/2010 – C7-0014/2011 – 2010/0821(NLE))

The European Parliament ,

–  having regard to Article 48(6) and Article 48(2) of the Treaty on European Union (TEU),

–  having regard to the final report of the Task Force to the European Council on ‘Strengthening Economic Governance in the EU’,

–  having regard to the draft European Council decision amending Article 136 of the Treaty on the Functioning of the European Union (TFEU), as submitted to the European Council on 16 December 2010 (00033/2010 – C7-0014/2011),

–  having regard to the letters from the Presidents of the European Council and of the Euro Group and the Commissioner responsible for monetary policy, annexed to this resolution,

–  having regard to Rule 74b of its Rules of Procedure,

–  having regard to the letter of 18 February 2011 from the Committee on Budgets to the Committee on Constitutional Affairs,

–  having regard to the report of the Committee on Constitutional Affairs and the opinion of the Committee on Economic and Monetary Affairs (A7-0052/2011),

A.  whereas Article 3(4) TEU states: ‘The Union shall establish an economic and monetary union whose currency is the euro’,

B.  whereas the United Kingdom has opted out of the single currency,

C.  whereas, under Article 3(1) TFEU, ‘monetary policy for the Member States whose currency is the euro’ is an exclusive competence of the Union,

D.  whereas Article 5(1) TFEU provides: ‘The Member States shall coordinate their economic policies within the Union’, with specific provisions applying to those Member States whose currency is the euro,

E.  whereas the draft European Council decision, if adopted, might lead to the constitution of a mechanism completely outside the Union's sphere, without any role being assigned to the Union institutions as such,

F.  whereas participation by the Union institutions in the new European stability mechanism should be fully ensured and permanently safeguarded and a link should be established for the possible intervention of the Union budget in the guarantee system,

G.  whereas all possibilities should be explored with a view to bringing the European stability mechanism fully into the institutional framework of the Union and providing for the involvement in it of those Member States whose currency is not the euro; whereas this may include recourse to Article 20 TEU on enhanced cooperation, where this is appropriate in order to ensure the consistency of the Union's economic policy,

H.  whereas the rules governing the European stability mechanism should preferably be proposed by the Commission, and should ensure appropriate audit, accountability and transparency arrangements,

I.  whereas the European stability mechanism should be accompanied by the strengthening of the preventive and corrective arm of the Stability and Growth Pact (SGP), and by measures relating to medium and long-term competitiveness and tackling macro-economic imbalances between Member States,

J.  whereas, as a complement to the European stability mechanism, the Union should promote a consolidated Eurobonds market,

K.  whereas the Commission should present proposals for legislation and where necessary Treaty revision, with a view to building, over the medium term, a system of economic government for the Union, and in particular for the euro area, which would strengthen the cohesion and competitiveness of the economy and stabilise the financial system,

L.  whereas Article 48(6) TEU allows the European Council, after consulting Parliament, to adopt a decision amending all or part of the provisions of Part Three of the TFEU without affecting the balance of competences between the Union and its Member States,

M.  whereas any increase or decrease of the Union competences would require an ordinary revision procedure,

N.  whereas any further revision of the TFEU should be conducted under the ordinary revision procedure,

O.  whereas the proposed decision can only enter into force once it has been approved by the Member States in accordance with their respective constitutional requirements,

1.  Emphasises that the monetary policy for the Member States whose currency is the euro is an exclusive competence of the Union and has been a Community policy since the Maastricht Treaty;

2.  Stresses the importance of the euro for the European political and economic project, and underlines the importance of the commitment made by all Member States in favour of the stability of the euro area and the sense of responsibility and solidarity they have shown;

3.  Stresses that the European stability mechanism constitutes an important part of a global package of measures which are designed to define a new framework, reinforcing budgetary discipline and coordination of economic and financial policies of the Member States which should include the promotion of a joint European Union response to growth challenges, concomitantly overcoming economic and social imbalances and improving competitivity;

4.  Notes that the Council has not used all the possibilities provided for by the Treaties to fully enforce the SGP and to improve economic coordination at European Union level;

5.  Considers that it is essential to go beyond the temporary measures aimed at stabilising the euro area, and that the Union should build up its economic governance, including by means of policies and instruments designed to promote sustainable growth in Member States; takes the view that the reinforcement of the SGP, the European semester, the EU 2020 strategy and the amendment of Article136 TFEU concerning the European stability mechanism are only a first step in that direction;

6.  Stresses that the European stability mechanism, and the strict conditionality incorporated therein, involves all Member States whose currency is the euro, even the small ones whose economy may be seen as not ‘indispensable’ for the purposes of safeguarding the euro area as a whole;

7.  Warns that the intention to establish the permanent stability mechanism outside the EU institutional framework poses a risk to the integrity of the Treaty-based system; considers that the Commission must be a member of the board of this mechanism, and not simply an observer; considers, moreover, that in this context the Commission should be entitled to take the appropriate initiatives in order to achieve, with the consent of the Member States concerned, the objectives of the European stability mechanism; underlines that Member States must at any rate respect Union law and the prerogatives of the institutions laid down therein;

8.  Stresses that the establishment and functioning of the permanent stability mechanism must fully respect the core principles of democratic decision-making such as transparency, parliamentary scrutiny and democratic accountability; emphasises that the European stability mechanism should closely involve the Union institutions and bodies responsible for monetary issues – the European Commission, the European Central Bank (ECB) and the European Investment Bank; underlines that the mechanism must not give rise to a new model of European governance which falls short of the level of democratic standards achieved in the Union;

9.  Regrets that the European Council has not explored all the possibilities contained in the Treaties for establishing a permanent stability mechanism; considers in particular that, in the framework of the present Union competences with regard to economic and monetary union (Article 3(4) TEU) and monetary policy for Member States whose currency is the euro (Article 3(1)(c) TFEU), it would have been appropriate to make use of the powers conferred on the Council in Article 136 TFEU, or in the alternative to have recourse to Article 352 TFEU in conjunction with Articles 133 and 136 TFEU;

10.  Calls on the Commission to look for other mechanisms to ensure the financial stability and sustainable and adequate economic growth of the euro area, and to make the necessary legislative proposals; underlines the need for the European stability mechanism to include measures used to reduce risks to financial, economic and social stability, including effective regulation of financial markets, revision of the SGP and better economic coordination, the introduction of instruments for the reduction of macroeconomic imbalances inside the euro area and measures directed at ecological reconstruction;

11.  Considers, moreover, that the setting-up and functioning of the permanent stability mechanism should be brought into the European Union framework, also making use, by analogy, of the institutional mechanism of enhanced cooperation as a means of involving the Union institutions at all stages and of encouraging the participation in the European stability mechanism of those Member States whose currency is not yet the euro;

12.  Notes that, in the light of the discussions in Parliament, the Heads of State and Government of the euro area agreed at their meeting of 11 March 2011, in the context of the pact for the euro, that the Commission should play a strong central role in the monitoring of the implementation of the commitments, in particular so as to ensure that measures are compatible with, and supportive of, the EU rules and the involvement of Parliament; notes that, in their consideration of the general features for the European stability mechanism, they agreed that assistance provided to a Member State whose currency is the euro will be based on a stringent programme of economic and fiscal adjustment and on a rigorous debt sustainability analysis conducted by the Commission and the International Monetary Fund (IMF), in liaison with the ECB;

13.  Acknowledges the positive signals perceived in the letters from the Presidents of the European Council and of the Euro Group and the Commissioner responsible for monetary policy; takes note that:

   the policy conditionality established under an enhanced surveillance or a macroeconomic adjustment programme will be defined by a regulation to be proposed by the Commission pursuant to Article 136 TFEU so as to ensure consistency with the EU multilateral surveillance framework;
   access to financial assistance under the European stability mechanism will be provided on the basis of a rigorous analysis of public-debt sustainability conducted by the Commission together with the IMF in liaison with the ECB; and strict policy conditionality under a macro-economic adjustment programme commensurate with the severity of the imbalances of the Member State concerned will be imposed;
   on the basis of the assessment provided by the Commission together with the IMF and in liaison with the ECB of the financial needs of the beneficiary Member State, the Board of Governors of the European stability mechanism will mandate the Commission to negotiate a macro-economic adjustment programme with the Member State concerned, together with the IMF and in liaison with the ECB;
   the Commission will propose to the Council a decision endorsing the macro-economic programme and, once that decision is adopted, will sign a Memorandum of Understanding on behalf of the Member States whose currency is the euro;
   the policy conditionality established under an enhanced surveillance or a macroeconomic adjustment programme will be made consistent with the European Union surveillance framework and must guarantee compliance with EU procedures;
   financial assistance will be activated on request by a Member State, after an assessment by the Commission, in liaison with the ECB, of the existence of a risk to the financial stability of the euro area as a whole;
   the Commission, together with the IMF and in liaison with the ECB, will be responsible for monitoring compliance with the policy conditionality and will report to the Council and to the Board of Directors;
   after discussion in the Board of Governors, the Council decision to implement post-programme surveillance will be taken on a proposal put forward by the Commission;
   Parliament will be regularly informed by the Council and the Commission about the establishment and the operations of the European stability mechanism and will thus be in a position to properly scrutinise its activities;
   the Court of Justice of the European Union will have jurisdiction in any dispute, in accordance with Article 273 TFEU;

14.  Endorses the draft European Council decision, notwithstanding its reservation that it would have been preferable to draft it as proposed in Annex I to this resolution; agrees with the view expressed in the opinion by the ECB supporting recourse to the Union method allowing for the European stability mechanism to become a Union mechanism at an appropriate point in time; calls on the European Council to ensure that:

   the regulation addressing the policy conditionality is adopted in accordance with the ordinary legislative procedure of the Union;
   every Member State whose currency is the euro and which has contributed to the permanent stability mechanism will have access to it independently of its size;

15.  Recalls that the future permanent stability mechanism should make use of the Union institutions, since this would avoid the setting-up of double structures which would prove detrimental to European integration;

16.  Demands that the lending conditions to be applied for the repayment of funds to the permanent stability mechanism in the event of its being activated be similar to those applied to the Balance-of-Payments Facility and Macro-financial Assistance instruments used by the Commission, i.e. strictly back-to-back without a margin over borrowing costs; furthermore considers that the interest rates to be used by the permanent stability mechanism should be offered on favourable terms;

17.  Insists that compliance by Member States with the economic guidelines set up by the Commission and with the conditions imposed by the European stability mechanism needs to be scrutinised by Parliament, and stresses that each national parliament shall be fully involved, in accordance with their budgetary and control rights, at all stages, especially in the context of the European semester, in order to increase the transparency, ownership and accountability of any decision taken;

18.  Endorses the Commission's intention to ‘ensure consistency between the future mechanism and the Union's economic governance in the euro area in particular, while respecting the competences conferred on the Union and its institutions by the Treaty’;

19.  Underlines that the draft European Council decision as amended would not increase the competences of the Union and would therefore remain within the scope of the simplified Treaty revision procedure; notes, conversely, that that decision cannot reduce the competences of the Union institutions in the fields of economic and monetary policy and of monetary policy for Member States whose currency is the euro, and cannot in any event prejudice the correct application of Union law, in particular Articles 122 and 143 TFEU, and of the Union acquis ;

20.  Reaffirms that the use of Article 48(6) TEU is an exceptional procedure, and recalls Parliament's right pursuant to Article 48(3) TEU to call for a Convention in order to reshape the institutions, procedures and policies that make up the economic governance of the Union;

21.  Instructs its President to forward this resolution to the European Council, the Council, the Commission and the European Central Bank as the opinion of the European Parliament pursuant to the second subparagraph of Article 48(6) TEU.


ANNEX I TO THE RESOLUTION

Amendment to Article 1 of the draft European Council decision

The following subparagraphs are added to Article 136(1) TFEU :"

On a recommendation from the Commission and after consulting the European Parliament, the Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area. The granting of any required financial assistance under the mechanism will be decided on the basis of a Commission proposal and made subject to strict conditionality criteria in accordance with the principles and objectives of the Union, as laid down in the Treaty on European Union and in this Treaty.

The principles and rules for the conditionality of financial assistance under the mechanism and its control shall be laid down in a regulation adopted in accordance with the ordinary legislative procedure.

"

Article 136(2) is replaced by the following: "

2.  For those measures set out in points (a) and (b) of paragraph 1, only members of the Council representing Member States whose currency is the euro shall take part in the vote.

A qualified majority of the said members shall be defined in accordance with Article 238(3)(a).

For those measures set out in the third subparagraph of paragraph 1, only members of the Council representing Member States participating in the mechanism shall take part in the vote.

"


ANNEX II TO THE RESOLUTION

Letter from the President of the European Council to the rapporteurs

Brussels, 22 March 2011

Dear Mr Brok, Dear Mr Gualtieri,

Following your various meetings and discussions with myself and members of my cabinet about the proposed amendment to Article 136 of the Treaty with regard to a stability mechanism for Member States whose currency is the euro, allow me send you the attached paper, drawn up by my cabinet, which examines and responds to the concerns you expressed.

  Mr Juncker, President of the Euro Group, and Mr Ollie Rehn, Commissioner for Economic and Monetary Affairs, are writing to you separately on the outcome of the negotiations on the detail of the future Mechanism, which I fully endorse.

I am sure that you will agree that all this should give Parliament a broad level of satisfaction with regard to the points laid out in option b) of your report.

As you know, this treaty amendment is coming before the 24-25 March European Council. You will appreciate the importance and urgency of this matter.

Yours sincerely

(signed)

Herman Van Rompuy

Annex

Concerning option a) in paragraph 12 of the report, which proposes to redraft the treaty amendment, it should be pointed out that this draft treaty amendment has been very carefully drawn up to make it acceptable to all Member States, which must all ratify it. There is virtually no prospect of the text as such being amended and indeed the amendments suggested would preclude the use of the simpli?ed revision procedure - or at the very least be subject to legal challenge on this ground. Legal certainty is the main reason for amending treaty in the ?rst place, and anything that undermined that would be problematic.

As regards future treaty amendments, it is impossible to give any speci?c undertaking. It has, however, been agreed that there will be an evaluation of the overall effectiveness of this framework in 2016, to be carried out by the European Commission. This provision guarantees that any future evaluation - and possible suggestions for change - will in the ?rst instance come from the Commission.

Turning to option b) of the report, concerns to the effect that the European Stability Mechanism might provide the nucleus of a future intergovernmental secretariat to manage the Eurozone economy are unfounded. The mechanism is for a speci?cally de?ned purpose. Its staff will be entirely devoted to the ?nancial and treasury aspects of this mechanism and will not be involved in the wider issues of economic governance. The ESM's role is to mobilise ?nance and provide ?nancial assistance, but the assessment of the need for ?nancial support and the de?nition of the conditionality will be done by the Commission.

Fears that the Commission may be excluded from the working of the mechanism can also be allayed. The experience with the temporary mechanisms demonstrates that Commission involvement is not only possible, but essential. Under the temporary mechanism, the conditionality measures regarding the recipient State was adopted using a Union procedure, i.e. a Decision adopted by the Council on a recommendation from the Commission based on Article 136 TFEU together with Article 126(9) TFEU (see Article 126 (13) which sets out the applicable procedure for decisions under Article 126 (9)). This is the procedure which has been followed for adopting the conditionality measures for Greece (see Council Decision (2010/320/EU) of 10 May 2010 (OJ L 145, 11.6.2010, p. 6) adopted on a recommendation from the Commission of 4 May 2010 (SEC(2010)0560 ?nal)).

Regarding the permanent Mechanism, already in the conclusions of the European Council of 16 and 17 December, in Annex II outlining the ‘General Features of the Future Mechanism’, Commission involvement is speci?ed explicitly a number of times. Since then, the preparatory work carried out for the ESM has clari?ed that:

–  If a Member State requests ?nancial assistance, it is the Commission which will assess, in liaison with the ECB, the existence of a risk to the ?nancial stability of the euro area as a whole and undertake an analysis of the sustainability of the public debt of the Member State concerned (together with the IMF and in liaison with the ECB).

–  If stability support is requested, it is the Commission (together with the IMF and in liaison with the ECB) which will assess the actual ?nancing needs of the bene?ciary Member State and the nature of the required private sector involvement.

–  The Board of Governors will mandate the Commission to negotiate (together with the IMF and in liaison with the ECB) a macro-economic adjustment programme with the Member State concerned.

–  The Commission will propose to the Council a decision endorsing the macro-economic adjustment programme. When the programme has been adopted by the Council, the Commission will sign the Memorandum of Understanding on behalf of the euro area Member States.

–  The Commission (together with the IMF and in liaison with the ECB) will be responsible for monitoring compliance with the policy conditionality required by a macroeconomic adjustment programme.

–  After discussion in the Board of Governors, it is a proposal by the Commission that the Council can decide to implement post-programme surveillance.

–  The policy conditionality established under an enhanced surveillance or a macroeconomic adjustment programme should be consistent with the EU surveillance framework and must guarantee the respect of EU procedures. To this end, the Commission intends to propose a Regulation clarifying the necessary procedural steps under Article 136 of the Treaty in order to enshrine the policy conditionality in Council decisions and ensure consistency with the EU multilateral surveillance framework.

–  The Council and the Commission will inform the European Parliament on a regular basis about the establishment and the operations of the ESM.

–  In the eventuality of certain disputes arising, it is the EU Court that will be responsible in accordance with Art. 273 TFEU.


ANNEX III TO THE RESOLUTION

Letter from the President of the Euro Group and from the Commissioner responsible for monetary policy to the rapporteurs

Brussels, 22 March 2011

Dear Mr Brok, Dear Mr Gualtieri,

We hereby wish to inform you of the outcome of the negotiations on the setting up of European Stability Mechanism, as this will be of importance for the European Parliament when it decides on its opinion on the draft amendment to the Treaty on the functioning of the European Union, based on your report.

An intergovernmental ministerial meeting ?nalised yesterday, 21 March, a Term Sheet on the European Stability Mechanism (ESM). You will ?nd attached the ?nal text of this Term Sheet.

As you can see, according to the Term Sheet, the ESM will be established by a treaty among the euro-area Member States as an intergovernmental organisation under public international law and will be located in Luxembourg. The ESM will have a Board of Governors consisting of the Ministers of Finance of the euro-area Member States (as voting members), with the European Commissioner for Economic and Monetary Affairs and the President of the ECB as observers. Non euro area Member States can participate on an ad hoc basis alongside the ESM in ?nancial assistance operations for euro area Member States.

The role of the Commission in the running of operations of the ESM is central, and the link of the ESM with EU institutions clearly established.

As described in the Term Sheet, it will be for the Commission to assess, in liaison with the ECB, the existence of a risk to the ?nancial stability of the euro area as a whole, and to undertake analysis of the sustainability of the public debt of the Member State concerned, together with the IMF and in liaison with the ECB. Further it will be for the Commission to take the lead in assessing the actual ?nancing needs of the bene?ciary Member State, as well as the nature of the required private sector involvement.

On the basis of this assessment, the Board of Governors will mandate the Commission to negotiate, together with the IMF and in liaison with the ECB, a macro-economic adjustment programme with the Member State concerned, detailed in a Memorandum of Understanding (MoU).

It will be for the Commission to propose to the Council a decision endorsing the macro-economic adjustment programme. The Board of Governors will decide on the granting of ?nancial assistance and the terms and conditions under which assistance is provided. When the programme has been adopted by the Council, the Commission will sign the MoU on behalf of the euro area Member States subject to prior mutual agreement by the Board of Governors. The Board of Directors will then approve the ?nancial assistance agreement which would contain the technical aspects of the ?nancial assistance to be provided.

The Commission, together with the IMF and in liaison with the ECB, will be responsible for monitoring compliance with the policy conditionality required by a macroeconomic adjustment programme. It will report to the Council and to the Board of Directors. On the basis of this report, the Board of Directors will decide by mutual agreement on the disbursement of the new tranches of the loan.

After discussion in the Board of Governors, the Council can decide, on a proposal by the Commission, to implement post-programme surveillance, which can be maintained for as long as a speci?ed amount of the ?nancial assistance has not been repaid.

The policy conditionality established under an enhanced surveillance or a macroeconomic adjustment programme will be consistent with the EU surveillance framework and must guarantee the respect of EU procedures, and thereby also the role of the European Parliament.

To this end, the Commission intends to propose a Regulation of the European Parliament and of the Council based on Article 136 of the Treaty, clarifying the necessary procedural steps in order to enshrine the policy conditionality in Council decisions and ensure consistency with the EU multilateral surveillance framework. The Council and the Commission will inform the European Parliament on a regular basis about the establishment and the operations of the ESM.

We trust this information will be helpful for the European Parliament for its consideration of the draft amendment to Article 136 TFEU with regard to a stability mechanism for Member States whose currency is the euro.

Yours sincerely,

(signed) (signed)

Olli Rehn Jean-Claude Juncker

Member of the European Commission President of the Euro Group

Copies:

President of the European Parliament

President of the European Council

President of the European Commission

Annex to the letter from the President of the Euro Group and from the Commissioner responsible for monetary policy to the rapporteurs

21 March 2011

Term Sheet on the ESM

The European Council has agreed on the need for euro-area Member States to establish a permanent stability mechanism: the European Stability Mechanism (ESM). The ESM will be activated by mutual agreement(1) , if indispensable to safeguarding the financial stability of the euro area as a whole. The ESM will assume the role of the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM) in providing external financial assistance to euro-area Member States after June 2013.

Access to ESM financial assistance will be provided on the basis of strict policy conditionality under a macro-economic adjustment programme and a rigorous analysis of public-debt sustainability, which will be conducted by the Commission together with the IMF and in liaison with the ECB. The beneficiary Member State will be required to put in place an appropriate form of private-sector involvement, according to the specific circumstances and in a manner fully consistent with IMF practices.

The ESM will have an effective lending capacity of € 500 billion(2) . The adequacy of the lending capacity will be reviewed on a regular basis and at least every five years. The ESM will seek to supplement its lending capacity through the participation of the IMF in financial assistance operations, while non-euro area Member States may also participate on an ad hoc basis.

The remainder of this term sheet sets out the key structural features of the ESM:

Institutional form

The ESM will be established by a treaty among the euro-area Member States as an intergovernmental organisation under public international law and will be located in Luxembourg. The statute of the ESM will be set out in an annex to the treaty.

Function and funding strategy

The function of the ESM will be to mobilise funding and provide financial assistance, under strict conditionality, to the benefit of euro-area Member States, which are experiencing or are threatened by severe financing problems, in order to safeguard the financial stability of the euro area as a whole.

The Member States of the euro area will give to the ESM the financial sanctions received under the Stability and Growth Pact and the Macroeconomic Imbalances procedures(3) . Such sanctions will form part of the paid-in capital.

The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources and enable it to extend financial assistance packages to Member States under all market conditions. Any associated risk will be contained through adequate asset and liability management.

Governance

The ESM will have a Board of Governors consisting of the Ministers of Finance of the euro-area Member States (as voting members), with the European Commissioner for Economic and Monetary Affairs and the President of the ECB as observers. The Board of Governors will elect a Chairperson from among its voting members.

The Board of Governors will be the highest decision-making body of the ESM and will take the following major decisions by mutual agreement:

   the granting of financial assistance;
   the terms and conditions of financial assistance;
   the lending capacity of the ESM;
   changes to the menu of instruments.

All other decisions by the Board of Governors will be taken by qualified majority, unless stated otherwise.

The ESM will have a Board of Directors, which will carry out specific tasks as delegated by the Board of Governors. Each euro-area Member state will appoint one Director and one alternate Director. In addition, the Commission and the ECB will each nominate an observer and an alternate to the Board of Directors. All decisions by the Board of Directors will be taken by qualified majority, unless otherwise stated.

Voting weights within the Board of Governors and the Board of Directors will be proportional to the Member States‘ respective subscriptions to the capital of the ESM. A qualified majority is defined as 80 percent of the votes.

The Board of Governors will appoint a Managing Director responsible for the day-to-day management of the ESM. The Managing Director will chair the Board of Directors.

Capital structure

The ESM will aim to obtain and maintain the highest credit rating from the major credit rating agencies.

The ESM will have a total subscribed capital of € 700 billion. Of this amount, € 80 billion will be in the form of paid-in capital provided by the euro-area Member States, of which € 40 billion will be available from July 2013 with the remaining share being phased in over the three following years. In addition, the ESM will also dispose of a combination of committed callable capital and of guarantees from euro area Member States to a total amount of € 620 billion.

The contribution key of each Member State in the total subscribed capital of the ESM will be based on the paid-in capital key of the ECB as annexed. By ratifying the Treaty establishing the ESM, Member States legally commit to provide their contribution to the total subscribed capital.

The Board of Governors will decide by mutual agreement when adapting the amount of total subscribed capital or when calling capital, except in the specific cases described below. First, the Board of Directors can decide, by simple majority, to restore -by calling in capital- the level of paid-in capital in the event that the amount of paid-in capital is reduced by the absorption of losses(4) . Second, an on-demand guarantee procedure will be put in place that allows calling in capital automatically from the shareholders of the ESM if needed to avoid a payment shortfall to the creditors of the ESM. The liability of each shareholder will in all circumstances be limited to its share in the subscribed capital.

Any contribution to subscribed capital by a Member State(5) joining the ESM after July 2013 will be made according to the same terms applied for the original contributions. The practical implications for the overall amount of subscribed capital and the distribution of capital among the Member States will be decided by the Board of Governors by mutual agreement.

As long as the ESM has not been activated and provided that the effective lending capacity is not less than 500 billion, the proceeds from the investment of the ESM paid-in capital will be returned to the Member States, after deductions for operational costs. Following the first activation of the ESM, the proceeds from the investment of ESM capital and financial assistance activity will be retained within the ESM. However, in the event that paid-in capital exceeds the level required to maintain the lending capacity of the ESM, the Board of Directors can decide, by simple majority to distribute a dividend to the euro-area Member States based on the contribution key.

Instruments

The ESM will provide financial assistance subject to strict conditionality under a macro-economic adjustment programme, commensurate with the severity of the imbalances of the Member State. It will be provided through loans.

However, it may intervene, as an exception, in debt primary markets on the basis of a macro-economic adjustment programme with strict conditionality and if agreed by the Board of Governors by mutual agreement.

ESM stability support (ESS)

The ESM can grant short-term or medium term stability support to a euro-area Member State, which is experiencing severe financing problems. Access to an ESS will imply a macroeconomic adjustment programme with adequate policy conditionality commensurate with the severity of the underlying imbalances in the beneficiary Member State. The length of the programme and maturity of the loans will depend on the nature of the imbalances and the prospects of the beneficiary Member States regaining access to financial markets within the time that ESM resources are available.

Primary market support facility

The ESM can purchase the bonds of a Member State, which is experiencing severe financing problems, on the primary market, with the objective of maximizing the cost efficiency of the support. Conditions and modalities under which bond purchasing would be conducted will be specified in the Decision on the terms and conditions of financial assistance.

The Board of Governors may review the instruments at the ESM's disposal and may decide to make changes to the menu of instruments.

IMF involvement

The ESM will cooperate very closely with the IMF in providing financial assistance(6) . In all circumstances, active participation of the IMF will be sought, both on the technical and the financial level. The debt sustainability analysis will be jointly conducted by the Commission and the IMF, in liaison with the ECB. The policy conditions attached to a joint ESM/IMF assistance will be negotiated jointly by the Commission and the IMF, in liaison with the ECB.

Activation of financial assistance, programme monitoring and follow-up

Financial assistance from the ESM will in all cases be activated on a request from a Member State to the other Members States of the euro area. The Eurogroup will inform the Council that a request for activation of support has been made. On receipt of such a request, the Board of Governors will ask the Commission to assess, in liaison with the ECB, the existence of a risk to the financial stability of the euro area as a whole and to undertake a rigorous analysis of the sustainability of the public debt of the Member State concerned, together with the IMF and in liaison with the ECB. The subsequent steps in the activation of ESM financial assistance will be as follows:

   If an ESS is requested, the Commission, together with the IMF and in liaison with the ECB, will assess the actual financing needs of the beneficiary Member State and the nature of the required private sector involvement, which should be consistent with IMF practices.
   On the basis of this assessment, the Board of Governors will mandate the Commission to negotiate, together with the IMF and in liaison with the ECB, a macro-economic adjustment programme with the Member State concerned, detailed in a MoU.
   The Commission will propose to the Council a decision endorsing the macro-economic adjustment programme. The Board of Governors will decide on the granting of financial assistance and the terms and conditions under which assistance is provided. When the programme has been adopted by the Council, the Commission will sign the MoU on behalf of the euro area Member States subject to prior mutual agreement by the Board of Governors. The Board of Directors will then approve the financial assistance agreement which would contain the technical aspects of the financial assistance to be provided.
   The Commission, together with the IMF and in liaison with the ECB, will be responsible for monitoring compliance with the policy conditionality required by a macroeconomic adjustment programme. It will report to the Council and to the Board of Directors. On the basis of this report, the Board of Directors will decide by mutual agreement on the disbursement of the new tranches of the loan.
   After discussion in the Board of Governors, the Council can decide, on a proposal by the Commission, to implement post-programme surveillance, which can be maintained for as long as a specified amount of the financial assistance has not been repaid.

Consistency with the EU multilateral surveillance framework

Approval by the EU Member States will be sought to allow the euro-area Member States to task the Commission, together with the IMF and in liaison with the ECB, the analysis of the debt sustainability of the Member State requesting financial support, the preparation of the adjustment programme accompanying the financial assistance, as well as with the monitoring of its implementation.

While the Board of Governors has the autonomy to decide on the existence and modalities of financial assistance under an intergovernmental framework, the policy conditionality established under an enhanced surveillance or a macroeconomic adjustment programme should be consistent with the EU surveillance framework and must guarantee the respect of EU procedures. To this end, the Commission intends to propose a Regulation clarifying the necessary procedural steps under Article 136 of the Treaty in order to enshrine the policy conditionality in Council decisions and ensure consistency with the EU multilateral surveillance framework. The Council and the Commission will inform the European Parliament on a regular basis about the establishment and the operations of the ESM.

Pricing

The Board of Governors will decide on the pricing structure for financial assistance to a beneficiary Member State.

The ESM will be able to lend at a fixed or variable rate. The pricing of the ESM will be in line with IMF pricing principles and, while remaining above the funding costs of ESM, will include an adequate mark up for risks.

The following pricing structure will apply to ESM loans:

   1) ESM funding cost
   2) A charge of 200 bps applied on the entire loans
   3) A surcharge of 100 bps for loan amounts outstanding after 3 years

For fixed rate loans with maturities above 3 years, the margin will be a weighted average of the charge of 200 bps for the first 3 years and 200 bps plus 100 bps for the following years.

The pricing structure will be defined in the pricing policy of the ESM, which will be reviewed periodically.

Private sector involvement

1.  Modalities for involving the private sector

An adequate and proportionate form of private-sector involvement will be expected in all cases where financial assistance is received by the beneficiary State. The nature and extent of this involvement will be determined on a case-by-case basis and will depend on the outcome of a debt sustainability analysis, in line with IMF practice(7) , and on potential implications for euro-area financial stability.

(a)  If, on the basis of a sustainability analysis, it is concluded that a macro-economic adjustment programme can realistically restore the public debt to a sustainable path , the beneficiary Member State will take initiatives aimed at encouraging the main private investors to maintain their exposures (e.g. a ‘Vienna Initiative’ approach). The Commission, the IMF, the ECB and the EBA will be closely involved in monitoring the implementation of such initiatives.

(b)  If, on the basis of a sustainability analysis, it is concluded that a macro-economic programme cannot realistically restore the public debt to a sustainable path, the beneficiary Member State will be required to engage in active negotiations in good faith with its creditors to secure their direct involvement in restoring debt sustainability. The granting of the financial assistance will be contingent on the Member State having a credible plan and demonstrating sufficient commitment to ensure adequate and proportionate private sector involvement. Progress in the implementation of the plan will be monitored under the programme and will be taken into account in the decision on disbursements.

In negotiating with creditors, the beneficiary Member State will adhere to the following principles:

  Proportionality: the Member State will seek solutions proportionate to its debt sustainability problem.

  Transparency : the Member State concerned will engage in an open dialogue with creditors and share relevant information with them on a timely basis.

  Fairness: the Member State will consult creditors on the design of any rescheduling or restructuring of public debt with a view to reaching negotiated solutions. Measures reducing the net present value of the debt will be considered only when other options are unlikely to deliver the expected results.

  Cross-border co-ordination: the risk of contagion and potential spill over effects on other Member States and third countries will be duly taken into account in the design of measures to involve the private sector. The measures taken will be accompanied with a proper communication by the Member State concerned aimed at preserving the financial stability of the Euro Area as a whole.

2.  Collective Action Clauses

Collective Action Clauses (CACs) will be included in all new euro area government securities, with maturity above one year, from July 2013. The objective of such CACs will be to facilitate agreement between the sovereign and its private-sector creditors in the context of private sector involvement. The inclusion of CACs in a bond will not imply a higher probability of default or of debt restructuring relating to that bond. Accordingly, the creditor status of sovereign debt will not be affected by the inclusion of CACs.

The main features of the CACs will be consistent with those commonly used in the US and the UK markets since the G10 report on CACs. CACs will be introduced in a way which preserves a level playing field among euro area Member States. This implies the use of identical and standardized clauses for all euro area Member States, harmonized in the terms and conditions of securities issued by the Members States. Their basis will be consistent with the CACs that are common in New York and English law .

CACs will include an aggregation clause , enabling a super majority of bondholders across multiple bond issues subject to such a clause and subject to the law of a single jurisdiction to include a majority action clause where the needed majority of creditors for the restructuration would not be attained within a single bond issue. Appropriate representation will be put in place. Most important issues – the reserve matters – (e.g. key payment terms, conversion or exchange of bonds) will be decided with a larger majority than non-reserve matters. Appropriate quorum requirements will apply. Changes agreed by the relevant majorities are binding on all bondholders.

An appropriate disenfranchisement clause will apply to ensure a proper voting process. Appropriate clauses to prevent disruptive legal action will be considered.

CACs will be introduced in a standardized manner, which ensures that their legal impact is identical in all euro-area jurisdictions and so preserves a level playing field among euro-area Member States. The euro area Member States will adopt the necessary measures to give effect to the CACs.

Euro area Member States will be allowed to continue to ‘tap’ outstanding debt without CACs under pre-determined conditions after June 2013 in order to preserve the necessary liquidity of old bonds and to give sufficient time to euro area Member States to create, in an orderly fashion, new bonds on all benchmark maturities. The detailed legal arrangements for including CACs in euro-area government securities will be decided on the basis of work to be undertaken by the EFC Sub-Committee on EU Sovereign Debt Markets, following appropriate consultation with market participants and other stakeholders, and be finalised by the end of 2011.

3.  Preferred Creditor Status of the ESM

Like the IMF, the ESM will provide financial assistance to a Member State when its regular access to market financing is impaired. Reflecting this, Heads of State or Government have stated that the ESM will enjoy preferred creditor status in a similar fashion to the IMF, while accepting preferred creditor status of IMF over ESM.

This shall be effective as of 1 July 2013 without prejudice to the terms and conditions of any other agreement provided under the EFSF and the Greek facility.

Transitional arrangements between EFSF and ESM

As originally foreseen, the EFSF will remain in place after June 2013 so as to administer the outstanding bonds. It will remain operational until it has received full payment of the financing granted to the Member States and has repaid its liabilities under the financial instruments issued and any obligations to reimburse guarantors. Undisbursed and unfunded portions of existing loan facilities should be transferred to the ESM (e.g. payment and financing of instalments that would become due only after the entry into force of ESM). The consolidated EFSF and ESM lending shall not exceed € 500 bn.

To ensure a smooth transition from the EFSF to the ESM, the CEO of the EFSF will be tasked with the practical preparation of the establishment of the ESM. He will regularly report on the progress made to the Eurogroup Working Group.

Participation of the non euro area Member States

Non euro area Member States can participate on an ad hoc basis alongside the ESM in financial assistance operations for euro area Member States. If non-euro area Member States participate in such operations, they will be represented in the relevant meetings of the ESM boards that will decide on the granting and the monitoring of the assistance. They will have access to all relevant information in a timely manner and be appropriately consulted. The euro area Member States will support equivalent creditor status of the ESM and that of other Member States lending bilaterally alongside the ESM.

Dispute settlement

If a dispute arises between a euro area Member State and the ESM in connection with the interpretation and application of the treaty establishing the ESM, the Board of Governors will decide on this dispute. If the Member State contests this decision, such dispute shall be submitted to the European Court of Justice in accordance with Art. 273 TFEU.

With regard to the relationship between the ESM and third parties, the applicable governing law and jurisdiction will be dealt with by the legal and contractual documentation which will then be put in place between the ESM and those third parties.

Annex: ESM contribution key based on the ECB key

ESM contribution key

Country

ISO

ESM key

Austria

AT

2.783

Belgium

BE

3.477

Cyprus

CY

0.196

Estonia

EE

0.186

Finland

FI

1.797

France

FR

20.386

Germany

DE

27.146

Greece

EL

2.817

Ireland

IE

1.592

Italy

IT

17.914

Luxembourg

LU

0.250

Malta

MT

0.073

Netherlands

NL

5.717

Portugal

PT

2.509

Slovakia

SK

0.824

Slovenia

SI

0.428

Spain

ES

11.904

Total

EA17

100.0

Notes: The ESM key is based on the ECB capital contribution key.

Member States with a GDP per capita of less than 75% of the EU average will benefit from a temporary correction for a period of 12 years after their entry in the euro area.

This temporary correction will be three quarters of the difference between GNI and ECB capital shares (effectively comprising of 75% of GNI share and 25% of ECB capital share) as follows: ESM share = ECB key share - 0,75*(ECB key share - GNI share)

The downwards compensation on those countries is redistributed among all the other countries according to their ECB key share.

GNI and GDP per capita in 2010.

Sources: ECB, Ameco and DG ECFIN calculations.

(1) A decision taken by mutual agreement is a decision taken by unanimity of the Member States participating to the vote, i.e. abstentions do not prevent the decision from being adopted.
(2) During the transition from EFSF to ESM, the combined lending capacity will not exceed this amount.
(3) Subject to a final agreement at political level.
(4) The vote of the Member State whose default is at the origin of the loss to be covered is suspended for this decision.
(5) As a consequence of joining the euro area, a Member State shall become a member of the ESM with full rights and obligations.
(6) It is however understood that any IMF involvement will be consistent with its mandate under the Articles of Agreement and by applicable decision and policies of the IMF Board.
(7) In line with the IMF, debt is considered sustainable when a borrower is expected to be able to continue servicing its debts without an unrealistically large correction to its income and expenditure. This judgement determines the availability and the appropriate scale of financing.

Last updated: 19 June 2012Legal notice