The European Stability Mecanism

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Furthermore, every loan granted by the ESM will benefit from the status of privileged debt, which means that the ESM will be refunded just after the IMF. The ESM also gets financial possibilities by borrowing in the financial markets, selling bonds.

The ESM already helped two countries in Europe since its creation. Firstly, in 2012, the ESM provided a loan of €41.3 billion to recapitalize the Spain’s banking sector. The loan was composed of debt securities and bonds. Nevertheless, the ESM took care of the Cyprus crisis more recently and it was a success. Finally, the ESM is still occupied today with the Greek crisis. Until 2018, the organization will provide approximately €86 billion, loan have been granted to the Greek nation. Even if the ESM have influence in Europe, it is still submissive to the IFM.

It is noticeable that there was not any contribution from the United Kingdom. However, before the Brexit, they indirectly contributed to Eurozone bailouts with the IMF contribution. The UK also made a financial assistance in the case of the Republic of Ireland, but it was only for its political interests. However, the UK was aware that it would be potentially affected by other countries of European Union, so it also contributed indirectly for the bailout of Portugal.

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1.2) An objective bailout policy: a financial assistance under particular concrete conditions

The ESM is the sole and permanent mechanism for responding to new requests for financial assistance by euro area Member States. Consequently, the ESM must have concrete conditions, in order to decide either giving a financial assistance or not to a state.

A member state can ask for a bailout or a financial assistance if it is in concrete financial difficulty, or with a financial sector in need of recapitalization. The member state must have signed the Memorandum of Understanding (MoU), which is a bilateral (or multilateral) agreement between parties (in this case, the parties are the states), indicating an intended common line of action. Consequently, the state applying for a bailout has to follow the instructions of the ESM about needed reforms or fiscal consolidation.

Another precondition is that the member state must have ratified the European Fiscal Compact: national budget are supposed to be in balance or surplus, under the treaty’s definition, and in case of significant deviations, there is an “automatic correction mechanism” according to the treaty.

When the member state is applying for a bailout, the state is analyzed and evaluated by a process called Troika: it is a decision group formed by the European Commission, the European Central Bank and the International Monetary Fund. Finally, the ESM will decide between one of its five different ways of assistance (part 1.1), if the state is considered as in necessity. As an example, in the case of Spain, the conditions of assistance were focused on the banks, whereas for Cyprus, the conditions were about the government spending and the healthcare and pension reforms.

Finally, it is obvious that even if concrete and objective conditions have been set up in order to respond to each request for financial assistance, the ESM has to work on a case-by-case basis. Each state and each request is specific, and needs consequently a specific assistance.

Transition: The ESM has effectively succeeded in creating an organization based on 5 ways of assistance, aiming at saving countries in financial necessity. Even more, the conditions required are quite concrete, and seem to protect each member state from a crisis. However, the ESM is largely criticized because of its architecture and its consistency in the long run.

2) The ESM architecture facing major problems, weakening the consistency of this mechanism in the long run

Estonia, Germany, Finland, France, Netherlands, Slovakia… Loads of political party in member states of the ESM criticize the consistency of the organization, denouncing it as being undemocratic and unconstitutional (Subsection 1), but also inefficient and counterproductive (Subsection 2).

2.1) A symbol of the European Union authority, over the popular sovereignty: a lack of democracy?

"We are very pro-Europe, but for a constitutional and democratic Europe," says Herta Daeubler-Gmelin, a German lawyer and politician of the Social Democratic Party. Indeed, of the main critic about the ESM is certainly the fact that the organization confines the economic sovereignty of its member states, whereas each state of the European Union is supposed to listen the voice of its population and, by this way, the Constitution. According to the pyramid of Kelsen, only the international treaties are able to impose something with a higher voice than the Constitution, and that is the main point of the ESM: it is legally an international treaty.

Therefore, the ESM gets probably an extensive power and immunity to the board of ESM Governors because of the lack of parliamentary influence or control. In France, the political party Le Front de Gauche believes that the ESM imposes automatically austerity policies at the moment when a financial assistance is given to a state. Indeed, the ESM assistance goes hand in hand with the Budgetary Pacte, which implicates these austerity policies involving an increase of the retirement age, a significant decrease of salaries and wages, a reduction of social expenses etc. That’s why, Patrick Le Hyaric, director of L’Humanité, highlights the fact that the organization is actually not elected by universal suffrage, so their power is not given by a popular desire. In France there are other political parties that share this way of thinking: the president of Debout la République, Nicolas Dupont-Aignan or the president of one of the first political party, Marine Le Pen, criticize strongly this organization. Marine Le Pen talks about “a jail for the population”, denouncing a “mechanism working for the financial powers”, establishing in reality a “denial of Democracy”.

Even if one share or not the political ideas and concepts of Marine Le Pen or other political parties, it is hard to deny the lack of transparency. Indeed, the ESM director Klaus Regling expressed at a conference over a decade ago: “there is a trade-off between transparency and efficiency (…) in an emergency, the fund has to be able to act quickly even if that reduced the understanding of outsiders”. Therefore, the ESM seems to suffer from this image of uncontrollable power. Indeed, little is