The ESM’s €295 Billion: A Cornerstone of Eurozone Stability
The European Stability Mechanism (ESM) has once again become a central topic of discussion in Europe, particularly following the Covid-19 crisis. On April 9th, EU finance ministers reached a consensus, designating the ESM, alongside the European Commission and the European Investment Bank (EIB), as a key contributor to the collective European crisis response initiatives.
In response to the ongoing pandemic, the finance ministers requested the ESM to establish a Pandemic Crisis Support credit line, set at 2% of each member state’s GDP. For the 19 Eurozone countries, this amounts to approximately €240 billion. This specific credit line is designed to address the unique challenges of the coronavirus crisis and can be accessed upon request, under pre-defined standardized terms. The single prerequisite for accessing this financial support is a commitment to allocate the funds towards direct and indirect healthcare expenditures, treatments, and preventative measures related to the crisis. Essentially, the aim is to safeguard European lives and effectively combat the immediate public health threat.
The discourse surrounding the ESM often revisits its crucial role during the Eurozone crisis of 2010 and the subsequent years. Drawing upon my experience as former mission chief for Ireland and later Greece, I aim to elucidate the beneficial impact of our assistance, in collaboration with partner institutions, for the Eurozone as a whole and the program countries specifically, arguing that it surpassed any other viable alternatives at the time.
Established in October 2012 as a permanent institution, the ESM’s primary objective is to ensure the financial stability of the Eurozone. It succeeded the temporary European Financial Stability Facility (EFSF), which was created in June 2010. Over the past nine years, the EFSF and ESM have collectively disbursed €295 billion in loans to five nations: Ireland, Portugal, Greece, Spain, and Cyprus. These substantial loans, characterized by remarkably low interest rates and extended maturities, effectively eased financial pressures on these countries. They provided the necessary time and fiscal space for these nations to implement crucial reforms and address underlying structural issues that had precipitated their crises. Significantly, all recipient countries have successfully concluded their programs and have since demonstrated some of the highest growth and job creation rates within the Eurozone.
Our lending operations are not financed by taxpayer money. Instead, we issue bonds in the financial markets, secured by guarantees (EFSF) and capital (ESM) jointly provided by all member states. These bonds, along with those issued by the European Commission and the EIB, can be broadly categorized as Eurobonds, representing a form of European collective financial instrument.
The ESM’s €80 billion of paid-in capital, contributed by its 19 members, is strategically reserved not for direct lending but to maintain our strong credit ratings. This capital is invested in the safest possible assets to protect member states’ financial resources. Combined with the remaining subscribed capital, totaling €700 billion, the ESM possesses the capacity to guarantee affordable financial assistance of up to €500 billion, with €410 billion currently still available.
I acknowledge that the necessary reforms undertaken by countries that benefited from EFSF and ESM loans were indeed challenging. However, these reforms were indispensable to rectify the damage caused by past policy missteps accumulated over many years. The economic and social repercussions would have been far more severe without our financial intervention. The most probable outcome in the absence of ESM support would have been the exit of some countries from the Eurozone, leading to significantly greater social hardship and economic instability across the region.
The positive results of the ESM stability programs are now evident. These economies are experiencing renewed growth, unemployment rates are declining, and the overall quality of life is improving.
Finally, let me provide context regarding the timeline of the three Greek programs. The initial program, approved in May 2010, predated the establishment of the EFSF. Eurozone members directly contributed €52.9 billion to Greece. For instance, Germany provided €15 billion, and Italy transferred €10 billion from Rome to Athens. These funds were directly sourced from European taxpayers, representing an act of European solidarity. However, this direct approach increased the national debts of the contributing nations, leading to the realization that a mechanism was needed to provide financial assistance without burdening creditors’ national accounts. This realization ultimately led to the creation of the EFSF and subsequently the ESM.
The conditions associated with the loans, often referred to as “austerity measures,” were negotiated by various institutions including the European Commission, European Central Bank, ESM, and International Monetary Fund, each acting within their respective mandates but under the guidance and unanimous approval of all Eurozone finance ministers. National parliaments were also involved according to member-specific procedures. We were acutely aware of the impact of these decisions on people’s lives and fully acknowledge the hardships endured. Simultaneously, we firmly believed that this course of action was essential for Greece to remain within the currency union and to secure its long-term economic stability within the Eurozone.
In the third Greek program, the Heads of State or Government became directly involved during a period when the very existence of the euro was at stake. Their unanimous statement on July 12, 2015, explicitly outlined the conditions for the Greek loan.
The ESM consistently provided loans to Greece under highly favorable conditions, including very low interest rates, subsequent reductions and waivers of fees, extending the loan maturity to 42.5 years (with the final repayment due in 2070), and deferring interest payments until 2032. These measures have resulted in and will continue to generate annual savings of approximately €13 billion for the Greek budget, equivalent to almost 7% of its GDP. Without these exceptionally favorable loan terms, Greece would have faced significantly higher debt servicing costs.
Maintaining Greece within the Eurozone was crucial not only for Greece itself but also for the stability of the entire Eurozone. The stability provided by the ESM enabled Greece to regain access to financial markets and to revitalize its economy, leading to job creation and economic recovery. The reforms implemented during these programs will better equip Greece and other beneficiary countries to navigate the economic and financial repercussions of the ongoing coronavirus crisis and future economic challenges.