ESM Reform

Saving for a Very Rainy Day

Regling attends the Asian Financial Forum in Hong Kong
Klaus Regling pointing the way to Euro-stability. Source: Reuters

“One of the great achievements of the crisis period,” gushed Jeroen Dijsselbloem, who chairs the informal meetings of euro-zone finance ministers known as the Eurogroup. He was referring to the European Stability Mechanism (ESM), more casually known as the “Euro bailout fund,” which on Sunday celebrated its fifth birthday. And what an eventful period that has been.

In its short lifetime, the Luxembourg-based fund has saved five euro-zone countries from bankruptcy, namely Cyprus, Greece, Ireland, Portugal, and Spain, by extending many billions in euro rescue packages. “The experiences of the last few years will help us as we continue to play a useful role in monetary union,” said Klaus Regling, the ESM’s managing director.

Indeed, the fund appears to be in the ascendant, because the euro zone’s finance ministers plan to significantly upgrade the institution. For months, speculation has circulated about the creation of a “European Monetary Fund,” although it’s still unclear what it would do. One EU diplomat said there are “widely diverging opinions on the issue.”

On Monday evening in Luxembourg, euro-zone finance ministers will hold their first exploratory discussion on the subject. Germany’s outgoing finance minister, Wolfgang Schäuble, makes no secret of his extensive demands. A Finance Ministry document obtained by Handelsblatt proposes that the ESM, with new, expanded responsibilities, should monitor those euro countries that fudged the EU’s debt rules and borrowed way too much.

Wolfgang Schäuble's goal is to disempower the European Commission, which he thinks bungled its job as EU budget watchdog.

But the plan is probably not going anywhere, and not just because Mr. Schäuble’s term in office is nearly over (today’s Eurogroup meeting will be his last). Mr. Schäuble’s foray is doomed because the tasks of the European Commission are enshrined in the Treaty of Lisbon. Anyone who wants to strip the Commission of powers must amend that treaty, which is currently out of the question.

Furthermore, Mr. Regling does not support erecting an ESM budgetary monitoring system alongside the Commission’s. Now more than ever, he knows his institution needs a good working relationship with Brussels.

Should Europe stumble into another financial crisis, fewer agencies will come to the rescue than last time. Given the European Central Bank’s support programs, the International Monetary Fund no longer wants to grant loans to euro countries. The IMF has also exited the “troika” of institutions (European Commission, ECB and IMF) that monitored budgets and reforms in beleaguered countries during the euro-zone crisis. The ECB, too, wants to quit the troika, which would leave only the European Commission and the ESM as lifeline-throwers – turning the troika into a duo.

Mr. Schäuble’s goal, clearly, is to disempower the European Commission, which he thinks bungled its job as EU budget watchdog. Instead of strictly enforcing the three-percent budget deficit ceiling, the Commission made repeated exceptions for profligate spenders such as Italy. The ESM, according to Mr. Schäuble, is more trustworthy, which is why the frugal Swabian wants it to assume the budget monitoring role.

The ESM's boss is calling for a "rainy-day fund" plus extra unemployment insurances, to provide loans quickly and unconditionally.

With the IMF out of the picture, monitoring of crisis countries will be left up to the ESM. More controversial, however, is the matter of whether the fund will have a new tool at its disposal: a small euro budget, destined for countries whose economies are hit by a severe shock through no fault of their own. For example, Brexit could plunge Ireland into a serious crisis, and the government in Dublin might be powerless to help.

For such cases Mr. Regling, the ESM boss, is calling for establishing a “rainy-day fund,” as well as extra unemployment insurance, to provide loans quickly and unconditionally. His proposal is based on the US model, where individual states have both rainy-day funds and a supplementary jobless insurance. The latter pays benefits when the unemployment rate exceeds a certain threshold.

Unlike the ESM’s euro bailout programs, countries receiving loans from these money pools would not have to meet any conditions – which is why the proposal has been resisted by so-called “hard currency” countries of Finland, Germany, and the Netherlands.

Another issue is whether the seemingly bottomless fund (the ESM’s lending capacity is a whopping €500 billion) will be involved in the liquidation of failed banks. If a member country is overwhelmed by a banking crisis, the ESM could swiftly become the lender of last resort. Germany’s Mr. Schäuble, a fiscal hardliner, always opposed the idea but his successor may have to accept it, because his country is quite alone on this issue within the euro zone.

The euro-zone finance ministers are still arguing, but they already agree that the reinvigorated ESM should not be called the European Monetary Fund. The ECB protested against the name, arguing that the central bank is solely responsible for monetary policy and money creation in the euro zone. Whatever the new entity’s name the ECB, still breathing hard from its titanic monetary support to euro zone countries, will be relieved not to be involved.

Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Martin Greive is a Handelsblatt correspondent based in Berlin. Jeremy Gray contributed to this story for Handelsblatt Global. To contact the authors:,,

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