NEWS Release - ESM welcomes report by Transparency International
EXECUTIVE SUMMARY
Founded in 2012, the ESM has become a crucial actor in the EU’s economic governance: it sells bonds on behalf of the Eurozone as a whole, and finances EU financial assistance programmes for countries in need. With less than 200 staff, most of its operations outsourced to other institutions, and its highest governing body indistinguishable from the informal Eurogroup, this study by Transparency International EU shows the EU’s bailout fund has not received the attention it deserves.
When a government loses access to financial markets and applies for a bailout, it becomes even more imperative to hold those institutions accountable that design and enforce the reform conditionality associated with ESM financial assistance. The ESM should be included in the EU treaty framework as a matter of priority, enabling it to take advantage of the EU’s transparency and integrity acquis.
The story of the ESM’s creation is a remarkable lesson in European integration. The EU treaties offered no legal basis for a bailout fund, and the ‘no-bailout clause’ contained in Art. 125 TFEU prohibits Member States from taking up each other’s liabilities. But the euro was under serious threat and leaders had the political will to overcome these obstacles and set up a bailout fund outside of the EU treaties, leading to the creation of the ESM. It entered into force in late 2012, as the permanent successor to a series of temporary and ad hoc bailout funds, which had become necessary as a result of ever-higher interest rates demanded on private bond markets for a series of Eurozone countries. After the Greek bailout, ‘contagion’ set in, its financial troubles translated into drastically higher interest payments, with Portugal, Ireland and Cyprus also losing access to financial markets. The ESM loans replace countries’ need to refinance their debt on private financial markets, allowing much lower interest rates than market rates, and giving countries time to make reforms and regain competitiveness.
Its access to financial markets hinges on Member States’ credibility and credit rating, as they have to make up for any losses which the ESM may incur in the event of a sovereign default. The ESM therefore enjoys very favourable lending conditions, and can make these low interest rates available to countries in need at no cost for the other Member States. Financial assistance is granted in return for strict conditionality: bailout countries have to implement a series of reforms and budget cuts, with successive tranches of ESM funds disbursed only when reform milestones have been met.
The EFSF and ESM have emerged as large players in the Euro area sovereign bond market, with outstanding bond volumes similar to that of a small euro area economy. While they have two distinct legal personalities, the EFSF and ESM share the same staff, management, and infrastructure, and incorporate the lessons learned throughout the euro area sovereign debt crisis. The ESM boasts world class audit arrangements, a code of conduct that ensures a high level of integrity, and a dedicated whistleblowing procedure that reflects best practice (see sections on integrity for details).
All countries but Greece have “graduated” from their macroeconomic adjustment programmes. After seven years of bailouts and reform conditionality, Greece is nearing the end of its third bailout. Our case study finds that it remains unclear if the targets for its primary budget surplus can realistically be achieved this time around, and whether the ESM and IMF can agree on a joint assessment of Greek debt sustainability. Increased transparency on economic modelling would help: there has been no accountability for the fundamentally wrong assumptions creditor institutions have made about the effects of austerity and fiscal multipliers on Eurozone economies. Enabling a reasoned debate between experts by releasing full details on the macroeconomic models, variables and assumptions used in the ESM’s calculations should be a priority. An ongoing dispute with the IMF over Greek debt sustainability means the Fund is still threatening to pull out from the most recent bailout. What looks like an arcane conflict over the methodology of debt sustainability assessments, has wide ranging consequences for Greece’s public finances and the delivery of public services for decades to come.
page source https://www.esm.europa.eu/
