EU strengthens financial safety net with agreement on European Stability Mechanism reform

The Eurogroup has agreed to a revised European Stability Mechanism (ESM), to be signed in January 2021. The agreement will need to be ratified and it is hoped that this can be done in the course of 2021.

Given the turbulent economic times, the agreement is a sign that the EU is willing to provide a financial safety net should it be needed. The ESM will be able to offer credit lines should the common backstop to the Single Resolution Fund (SRF) prove insufficient, becoming the EU’s ‘lender of last resort’.

The EU had made a commitment to introduce a common backstop before the end of 2023 in 2018, but this has been brought forward to 2022. While progress has been made on risk reduction, it is understood that the pandemic will slow progress. 

The ministers have tried to steer a careful path of maintaining financial stability, while aiming to protect taxpayers. Talks stalled at one stage over Italy’s concerns that ESM loans are seen as undemocratic by the far-right and more importantly, by some parts of the Five Star Movement, currently in the coalition government. This is due to the stringent structural adjustment policies that the ESM can impose, as seen in countries like Greece in the last crisis.

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