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The European Stabilization Mechanism

Commission Européenne - MEMO/10/173   10/05/2010

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MEMO/10/173

Brussels, 10 May 2010

The European Stabilization Mechanism

On 9 May, the Council has adopted a European Stabilisation Mechanism to preserve financial stability in Europe. The mechanism is based on Art. 122.2 of the Treaty and an intergovernmental agreement of euro area Member States. Earlier, the Commission had held an extraordinary meeting to adopt its proposal for a Regulation under Article 122.

What is the aim of the Mechanism?

This mechanism is about granting financial assistance to a Member State in difficulties or seriously threatened with severe difficulties caused by exceptional occurrences beyond its control.

This financial assistance shall take the form of a loan or of a credit line granted to the Member State concerned.

How does the Mechanism work?

Within the framework of this mechanism, the Commission is allowed via the facility created under Article 122 to contract borrowings on the capital markets or with financial institutions on behalf of the European Union. This approach to providing financial assistance is inspired by the existing Medium-Term Financing Facility (the Balance of Payments facility). 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. In addition, the Mechanism envisages possible financial assistance to a euro-area Member State via a special purpose vehicle (SPV), which will be established by intergovernmental agreement among all euro-area member States.

How much assistance is available under this Mechanism?

The amount of loans or credit lines available via the facility established under Article 122 shall be limited to the margin available under the own resources ceiling for payment appropriations of the EU budget. A volume of up to €60 bn is foreseen.

The SPV established by intergovernmental agreement amongst euro area Member States will guarantee on a pro-rata basis lending up to €440 bn.

Which countries are covered by this Mechanism?

The Mechanism has been created to preserve the stability, unity and integrity of the European Union. The facility provides assistance to any member state which is experiencing or is seriously threatened with a severe economic or financial disturbance caused by exceptional occurrences beyond its control. Financial assistance under the SPV will be provided only to euro area Member States however.

Non euro area member states remain also covered by the Balance of Payment facility. Under this facility, the Commission has already granted assistance to Latvia, Hungary and Romania.

Is this a bail-out?

No. This mechanism would allow the provision of loans, not grants. Loans have to be repaid with interest. As such it is compatible with Art 125 TFEU.

How can a Member State get assistance?

A Member State seeking financial assistance under the Mechanism shall discuss with the Commission in liaison with the ECB an assessment of its financial needs. It shall submit a draft economic and financial adjustment programme to the Commission and the Economic and Financial Committee.

Acting on a proposal by the Commission, the Council shall adopt a decision by qualified majority vote granting financial assistance

This Council decision shall include the maximum amount, price and duration of the financial support, the number of installments to be disbursed and the main policy conditions attached to the support. It shall entrust the Commission with the responsibility for negotiating a Memorandum of Understanding (MoU) with the country concerned detailing the conditionality.

How will this be monitored?

The Commission will closely monitor the respect of the policy conditions by the beneficiary Member State, in liaison with the ECB, before installments of the loan are disbursed. If it concludes that the conditions are met, it proposes to the participants to disburse the installments.

What is the legal basis for the Mechanism?

The Mechanism is based on a Council Decision adopted under Article 122, which requires "qualified majority" at the Council and the Parliament to be informed.and an intergovernmental agreement.


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