The European Stability Mechanism (ESM) in a nutshell (People’s Movement)


What is the European Stability Mechanism?

From 2013 the ESM will have the responsibility for providing loans to euro-zone member-states in difficulties—strictly conditional on the implementation of a range of “adjustment measures” and if the granting of the assistance is considered indispensable to safeguard the “stability of the euro area as a whole”—or, to put it more accurately, “assistance” conditional on turning a recipient country into a social and economic wasteland for the greater good of the euro.

Why amend the Treaty on the Functioning of the European Union to establish the ESM?

The EU authorities propose amending one of the EU treaties, the Treaty on the Functioning of the European Union, to give themselves a legal basis for establishing the ESM, using one of the self-amending provisions of the Lisbon Treaty. The Government proposes ratifying this amendment without reference to the people by way of a referendum. Part of the existing temporary EU “bail-out” arrangements will end in 2013.

The ESM was established under article 122 (2) of the TFEU but is under challenge in the German Constitutional Court. The German Chancellor, Angela Merkel, and French President, Nicholas Sarkozy, determined towards the end of 2010 to try to head off any further constitutional challenge and at the same time to take a further significant step along the road to total EU control of the economic policies of weaker member-states. The ESM, together with the Euro Plus Pact, is a quantum leap in EU economic government.

How can you argue that there must be a referendum on the ESM when the Government and Fianna Fáil “opposition” refuse to countenance one?

Article 6 of the Constitution of Ireland proclaims the right of the people “in final appeal to decide all questions of national policy, according to the requirements of the common good.”

The Supreme Court laid down in the Crotty case that, as legal sovereignty in this state rests with the Irish people, only they can surrender sovereignty to the EU by referendum (or refuse to surrender it, as the case may be).

The ESM is for much more than making permanent the temporary mechanism by which Ireland, Greece and Portugal are at present being “bailed out.” It is a surrender in matters of control of national economic policy necessitating an amendment to an EU treaty. The purpose of a referendum would be to determine whether or not the Constitution should be changed so as to make EU law superior to Irish law in the area set out in the proposed amendment.

The refusal of the Government to publish the opinion of the former Attorney-General, Paul Gallagher, and any legal opinion it has obtained since coming into office attests to the fear among the Fine Gael-Labour Party-Fianna Fáil troika of an assertive public opinion demanding what is the democratic and constitutional right of the citizens of this country.

Government decisions of fundamental importance for the future of this country for generations to come, such as the disastrous bank guarantee and, more recently, the EU-ECB-IMF “bail-out,” were made without reference to the citizens of the country. The almost seamless continuity between the policy of the new Government with that of the previous one has denied citizens an opportunity to say Yes or No to those decisions.

What will Ireland’s ESM financial liability be?

The state will be legally obliged to the ESM to the tune of approximately €11.13 billion—€1.28 billion in cash and the rest in the form of callable capital and guarantees.

Ireland has not been given an opt-out.

But that’s not the figure the Government gives!

No. The Tánaiste, Éamon Gilmore, gave a figure of €9.87 billion in response to a question in the Dáil on 13 April 2011, but in fact the country’s contribution is a set 1.59 per cent of the total subscribed capital of €700 billion, i.e. €11.13 billion. Gilmore confused the subscribed capital figure of €700 billion and the callable capital/guarantee figure of €620 billion when making the calculation.

But was Gilmore not at least correct to claim that “the manner in which the ESM is structured means that each country’s contribution will not impact on its general government deficit”?

There is no cheap, hassle-free way out of the present crisis, and certainly not through buying in to the ESM. Ireland will have to issue debt to raise the money to be able to pay the €1.29 billion of paid-in capital for the ESM. This is money that could make a substantial contribution to the survival of the country’s health service or our welfare and education systems. Also, after 2013 will be the worst time to be lumbered with such a commitment. We should have exited the present EU-ECB-IMF “bailout” regime from late 2012 and returned to the market.

The country would (in theory) have to refinance a lot of its own debt from the bail-out, and at the same time go into additional substantial debt to pay its share of the ESM. In short, the ESM simultaneously would make our bonds riskier and more susceptible to restructuring and require more of those very bonds to be issued, in order to pay for itself.

But isn’t it an example of EU solidarity?

The ESM would need €700 billion in order to borrow the €500 billion that would constitute its lending capacity: €80 billion in paid-in capital and €620 billion of “committed callable capital.” And Ireland, Greece and Portugal, the three countries that are now being subjected to euro-zone austerity schemes, will together be required to cough up or guarantee €49 billion of that sum.

It’s not “solidarity,” it’s robbery!

Could a situation arise whereby Ireland, Greece and Portugal would have to fork out more cash?

The German court of auditors recently showed how this could happen. In a report to the Bundestag’s budgetary committee, the court discovered that the paid-in capital that Germany and indeed any other euro-zone country might have to provide between 2013 and 2017 could be higher than foreseen. According to the decisions of the EU summit meeting in March, Germany would pay €21.7 billion out of the €80 billion of paid-in capital for the ESM. Merkel had insisted that the German government should be able to pay that money in five equal yearly tranches of €4.35 billion, which would be counted as expenditure in the budget.

But the auditors pointed out that this agreement becomes invalid if one country is unable to bear its share of paid-in capital and if at the same time another state requires the aid of the ESM. In that case the rate of paid-in capital in relation to its total of €700 billion could decline under the 15 per cent that is required by the rating agency to guarantee the ESM AAA rating. In that case the ESM shareholders could decide by simple majority—and, as a consequence, against Germany’s wishes—that the capital stock, and therefore the German contribution, needed to be increased.

This anomaly applies equally to Ireland, Greece and Portugal.

But for weaker euro-zone countries there is an additional problem. With regard to callable capital and guarantees, euro-zone countries like Ireland will be required to pay cash down.

Germany and France, whose sovereign bonds have a triple-A rating, would not need to put up actual money to cover any shortfall of paid-in capital: a guarantee would do. But as a guarantee has to serve as the equivalent of a prepaid cash payment, a guarantee by a non-triple-A country would not cover the shortfall, so countries with lower ratings (yes, you guessed them correctly!) would have to pay cash.

So we are in a perverse situation. Countries with easy access to capital can provide cheap guarantees, while the weaker countries must put up cash.

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This entry was posted in Bankers' Bailout, Budget, ECB/IMF, ESM / European Stability Mechanism and tagged , . Bookmark the permalink.

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