The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was established on 27 September 2012 as a permanent firewall for the eurozone, to safeguard and provide instant access to financial assistance programmes for member states of the eurozone in financial difficulty, with a maximum lending capacity of €500 billion. It has replaced two earlier temporary EU funding programmes: the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).
Overview The Treaty Establishing the European Stability Mechanism stipulated that the organization would be established if member states representing 90% of its capital requirements ratified the founding treaty. This threshold was surpassed with Germany's completion of the ratification process on 27 September 2012, which brought the treaty into force on that date for sixteen of the seventeen members of the eurozone. The remaining state, Estonia, which had only committed 0.19% of the capital, completed its ratification on 4 October 2012.ESM Treaty details A separate treaty, amending Article 136 of the Treaty on the Functioning of the European Union (TFEU) to authorize the establishment of the ESM under EU law, was planned to enter into force on 1 January 2013. However, the last of the then-27 European Union member states to complete their ratification of this amendment, the Czech Republic, did not do so until 23 April 2013, postponing its entry into force until 1 May 2013.
The ESM commenced its operations after an inaugural meeting on 8 October 2012. The first 40% of the paid-in capital was transferred by all ESM member states ahead of a treaty regulated deadline of 12 October 2012. ESM member states can apply for a bailout if they are in financial difficulty or their financial sector is a stability threat in need of recapitalization. ESM bailouts are conditional on member states first signing a memorandum of understanding, outlining a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability. Another precondition for receiving an ESM bailout is that the member state must have ratified the European Fiscal Compact. When applying for ESM support, the country in concern is analyzed and evaluated on all relevant financial stability matters by the so-called Troika (European Commission, ECB and IMF) in order to decide which of its five different kinds of support programmes should be offered.
As of April 2013, the ESM has approved two Financial Assistance Facility Agreement (FAFA) programmes, with up to €100bn earmarked for recapitalization of Spanish Banks, and €9bn in disbursements for Cyprus for a sovereign state bailout programme. The Cyprus bank recapitalization was funded by converting bank deposits into equity.
History Following the European sovereign debt crisis that resulted in the lending of money to EU states, there has been a drive to reform the functioning of the eurozone in the event of a crisis. This led to the creation, amongst other things, of a loan mechanism: the European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM). These, together with the International Monetary Fund, would lend money to EU states in trouble, in the same way that the European Central Bank can lend money to European banks. However, the EFSF and EFSM were intended only as a temporary measure (to expire in 2013), in part due to the lack of a legal basis in the EU treaties.
In order to resolve the issue, the German government felt a treaty amendment would be required. After the difficult ratification of the Treaty of Lisbon, many states and statesmen opposed reopening treaty amendment and the British government opposes changes affecting the United Kingdom.Van Rompuy wants clearer 'hierarchy' to deal with future crises, by Honor Mahony, EUobserver, 25.05.2010Don't expect Britain to back a new EU treaty, Cameron tells Merkel, by Tony Paterson, The Independent, 22.05.2010 However, after winning the support of French President Nicolas SarkozyBattle over treaty change divides Europe ahead of summit, by Leigh Phillips, EUobserver, 28.10.2010 Germany won support from the European Council in October 2010 for a new treaty. It would be a minimal amendment to strengthen sanctions and create a permanent lending-out mechanism. It would not fulfil the German demand to have the removal of voting rights as a sanction as that would require deeper treaty amendment. The treaty would be designed so there would be no need for referendums, providing the basis for a speedy ratification process, with the aim to have it completely ratified and come into force in July 2012. In that case, it was to co-exist with the temporary lending-out mechanism (EFSF) for one year, as EFSF was set only to expire as a rescue facility at 1 July 2013.
Treaty basis
Article 136 amendment of TFEU On 16 December 2010 the European Council agreed a two line amendment to Article 136 of the Treaty on the Functioning of the European Union (TFEU),EUROPEAN COUNCIL 16–17 DECEMBER 2010 CONCLUSIONS, European Council 17 December 2010 that would give the ESM legal legitimacyPhillips, Leigh (17 December 2010) EU leaders agree to tweak treaty, keep bail-out fund unchanged, EU Observer and was designed to avoid any referendums. The amendment simply changes the EU treaties to allow for a permanent mechanism to be established.EUROPEAN COUNCIL 16-17 DECEMBER 2010 CONCLUSIONS, European Council 17 December 2010 In March of the following year leaders also agreed to a separate eurozone-only treaty that would create the ESM itself.EUROPEAN COUNCIL 24/25 MARCH 2011 CONCLUSIONS
In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play 'a central role' in running the ESM, despite wishing it had been more involved earlier,Parliament approves Treaty change to allow stability mechanism, European ParliamentRetrieved 22 March 2011 Published 22 March 2011 and it was signed by all 27 EU member states on 25 March 2011. The amendment reads:
The amendment authorises the eurozone countries to establish a stability mechanism to protect the common currency, within EU law. This means, that the existing intergovernmental treaty having established ESM outside of the EU framework with entry into force 27 September 2012, might subsequently be transposed to become part of the EU framework once this TFEU article 136 amendment enters into force. The ESM established by the intergovernmental treaty was designed to be fully compatible with existing EU law, and the European Court of Justice ruled in November 2012 - that "the right of a Member State to conclude and ratify the ESM Treaty is not subject to the entry into force" of the TFEU amendment. The TFEU amendment came into force on 1 May 2013, after the Czech Republic became the last member state to ratify the agreement according to its respective constitutional requirements.
Treaty Establishing the European Stability Mechanism In addition to the "TFEU amendment" treaty, the European Stability Mechanism itself was established by a treaty among the eurozone states, named the Treaty Establishing the European Stability Mechanism, which sets out the details of how the ESM would operate. Formally, two treaties with this name were signed: one on 11 July 2011 and one on 2 February 2012, after the first turned out not to be substantial enough the second version was produced to "make it more effective". The 2012 version was signed by all 17 Eurozone members on 2 February 2012, and was planned to be ratified and enter force by mid-2012, when the EFSF and EFSM were set to expire. The treaty was concluded exclusively by eurozone states, amongst others because the UK refused to participate in any fiscal integration.Van Rompuy wants clearer 'hierarchy' to deal with future crises, by Honor Mahony, EUobserver, 25 May 2010Don't expect Britain to back a new EU treaty, Cameron tells Merkel, by Tony Paterson, The Independent, 22 May 2010
The Treaty establishing the ESM entered into force on 27 September 2012 for 16 signatories. Estonia completed their ratification on 3 October 2012, six days after the treaty entered into force. However, the inaugural meeting of the ESM did not occur until 8 October, after the treaty's entry into force for Estonia. Latvia's adoption of the euro on 1 January 2014 was given final approval by the Economic and Financial Affairs Council on 9 July, making them eligible to apply for ESM membership. Following Latvia's government giving their consent to joining to the ESM in November 2013, it acceded on 21 February 2014. The treaty entered into force for them on 13 March 2014. Latvia's contribution to the ESM will be €325 million. Lithuania adopted the euro on 1 January 2015, and acceded to the ESM on 14 January 2015, becoming a member on 3 February 2015. Croatia adopted the euro on 1 January 2023, acceded to the ESM on 2 March 2023 and became a member on 22 March 2023 when the Treaty entered into force for it. Bulgaria adopted the euro on 1 January 2026, acceded to the ESM on 9 June 2026 and became a member on 29 June 2026.
ESM's response to the COVID-19 pandemic crisis To support member states hit by the COVID-19 pandemic, the European Council suspended fiscal rules – including the ESM - applying the general escape clause of the Stability and Growth Pact on 23 March 2020Statement of EU ministers of finance on the Stability and Growth Pact in light of the COVID-19 crisis Retrieved 10 January 2021. and agreed to a massive recovery fund of €750 billion, branded Next Generation EU (NGEU), on 23 July 2020.Special meeting of the European Council July 2020 Retrieved 10 January 2021. The ESM for its part offered loans of €240 billion in May 2020.ESM backs Pandemic Crisis Support Retrieved 10 January 2021. But no country accepted the loan.Spanish government to dismiss ESM credit line in Spanish - Retrieved 10 January 2021.ESM mourns his failed financial offer Retrieved 10 January 2021. The NGEU fund is about investment to meet the COVID-19-caused economic downturn the reputation of the ESM is about bailing out private banks increasing public debt and thus causing disinvestment.Richard Baldwin, Francesco Giavazzi, The Eurozone Crisis. A consensus View of the Causes and a Few Possible Solutions, 2015, p.54, .
ESM Treaty Reform (since 2020) In June 2015, an updated EMU reform plan was released which envisaged that in the medium-term (between July 2017 and 2025) the ESM should be transposed from being an intergovernmental agreement to become fully integrated into the EU law framework applying to all eurozone member states under the competence provided for by the amended article 136 of the TFEU by 2025. Proposals by the European Commission to create a European Monetary Fund to replace the ESM were published in December 2017.
After reluctance to incorporate the ESM into EU law, on 30 November 2020 the finance ministers at the Eurogroup agreed to amend the treaties establishing the format of the ESM and Single Resolution Fund, to be ratified by all Eurozone member states. The reform proposal was blocked for months because of the veto of the Italian government. The proposed amendments include:
The establishment of the ESM as a "backstop" to the Single Resolution Fund (SRF), through a revolving credit line. Reform of the ESM Governance Mandatory introduction of single-limb collective action clauses (CACs) in new euro area sovereign bonds issued Changes of eligibility criteria to the precautionary financial assistance instruments Clarifications and expansions of the ESM mandate on economic governance;