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European financial stabilisation mechanism

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European financial stabilisation mechanism

The financial crisis that hit the global economy at the end of 2008 required the creation of a European financial stabilisation mechanism (EFSM), to help European Union countries in difficulty, thereby preserving the EU's financial stability.

ACT

Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism

SUMMARY

WHAT DOES THIS REGULATION DO?

It lays down the conditions and procedures for granting EU financial assistance to an EU country that, due to events beyond its control, is experiencing severe economic or financial disturbance or the threat thereof.

KEY POINTS

Financial assistance

Assistance is granted in the form of a loan or a credit line* granted to the EU country concerned. To this end, the European Commission may contract, on behalf of the EU, loans on capital markets or from financial institutions, in line with a decision adopted by the Council of the EU acting by qualified majority.

Procedure

With the Commission, and in liaison with the European Central Bank (ECB), the EU country seeking aid proceeds with an assessment of its financial needs. It then submits to the Commission a draft programme for economic and financial recovery.

The decision to grant a credit line contains the following information:

  • the terms of the financial assistance,
  • general economic policy conditions attached to the EU’s financial assistance (for example, fiscal consolidation measures to reduce public debt),
  • the approval of the adjustment programme prepared by the recipient country.

The Commission verifies at regular intervals whether the beneficiary country’s economic policy is consistent with its adjustment programme and with the conditions established by the Council to continue to receive financial aid, which is granted in instalments.

Compatibility with other financial support mechanisms

The European financial stabilisation mechanism is compatible with the medium-term facility providing financial assistance for balances of payments. Moreover, it does not preclude the use of funds from outside the EU, such as from the International Monetary Fund.

EFSM budget

The EFSM is funded by the EU budget. The Commission is allowed to borrow up to a total of €60 billion in financial markets on behalf of the EU. The loans are guaranteed by the EU budget.

The EFSM was activated for Ireland and Portugal, for a total amount of €46.8 billion (€22.5 billion for Ireland and €24.3 billion for Portugal), disbursed over 3 years (2011-2014).

In July 2015, EFSM has been used to provide short-term assistance (bridge loan) of €7.16 billion to Greece.

Specific arrangements concerning exposure of non-euro-area countries are in place.

BACKGROUND

The European Stability Mechanism (ESM) consolidates and merges the EFSM and the European Financial Stability Facility (EFSF), the 2 instruments set in place temporarily in the wake of the sovereign debt crisis, and with which it coexists today.

In time, the ESM will become the main support mechanism for euro area countries experiencing temporary difficulties in borrowing money on financial markets because of their debt levels. Its initial maximum lending capacity was €500 billion on the basis of a capital of €704.8 billion. The ESM is financed by the EU countries according to the ECB contribution key*.

The loans are financed by ESM borrowing on financial markets, and are guaranteed by its shareholders (euro area countries). Loans are on the basis of strict conditions, including the return of public finances to sustainable levels.

SINCE WHEN DOES THE REGULATION APPLY?

13 May 2010.

More information:

KEY TERMS

* Credit line: an authorisation given by the Council, on the proposal of the Commission, to an EU country to draw funds from the EFSM up to a specified ceiling for a given period of time.

* The ECB contribution key: this key is calculated to reflect the respective country’s share in the total population and gross domestic product of the EU. These 2 determinants have equal weighting.

REFERENCES

Act

Entry into force

Deadline for transposition in the Member States

Official Journal

Regulation (EU) No 407/2010

13.5.2010

-

OJ L 118, 12.5.2010, pp. 1-4

Act

Entry into force

Deadline for transposition in the Member States

Official Journal

Regulation (EU) 2015/1360

8.8.2015

-

OJ L 210, 7.8.2015, pp. 1-2

last update 14.09.2015

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