The EU’s emergency bailout loan vehicle, the European Stability Mechanism (ESM), should be given new powers to vet potential loan applicants’ budget policies, and proposed cuts and reform programmes, according to a paper drawn up by Ireland and a group of fiscally conservative member states.
The new Hanseatic League states argue that the ESM should get powers like the International Monetary Fund to better guarantee the sustainability of bailout loans, like those it made to Ireland and Greece, in a bid to strengthen the euro crisis architecture.
“The no bailout clause (TFEU article 125) requires that the borrower remains liable for its debts,” says the paper, which was drawn up for eurogroup ministers. “Accordingly, the ESM must always ensure that the member state has adequate repayment capacity, before financial assistance is granted.”
They also demand what might be termed a “burn the bondholder” policy under which the investors take their losses first, ahead of an ESM bailout, when a member state gets into trouble because of an unsustainable government debt.
Ministers at the eurogroup meeting on Monday will give the proposals an initial airing as part of a package of European Monetary Union proposals due to be decided at the December EU summit.
Moral hazard
Central to the Hanseatic proposal is the desire to strengthen provisions that remove elements of moral hazard in the way an expanded ESM would work as a backstop to troubled euro zone countries.
States must not be allowed to see the fund as a means of evading their responsibilities for fiscal discipline, the league argues.
“We support such a reinforced role for the ESM, as an intergovernmental institution accountable to its shareholders. Its primary role should remain the lender of last resort for euro area member states in need,” the paper says.
“The first line of defence in financial difficulties will always have to be at the national level . . . The ESM should only provide stability support when indispensable to the financial stability of the euro area as a whole and its member states.”
The Hanseatic League is an informal alliance of fiscally conservative states that was formed in March 2018 – Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, Sweden and the Netherlands. The paper is also signed by Slovakia and the Czech Republic.
Giving the ESM a supervisory role that is already in part covered by the commission is necessary, Dutch finance minister Wopke Hoekstra argues. "Now is the time to build a more robust and a more prosperous Europe, both financial and economic.
“We are now at a very good point in the economic cycle, so let’s make sure we prepare for times that might not be as good as today. We have to work on a more robust ESM, that is better-equipped, to do what is necessary – in the case of an extreme emergency scenario.”
