At the annual ‘State of the Union’ conference of the European Institute of Florence, on Thursday 10 and Friday 11 May, several economists and political decision-makers took a position in favour of a considerable reinforcement of the role of the European Stability Mechanism (ESM) but stopping short of calling for institutional changes.
These interventions echoed the package of texts on deepening Economic and Monetary Union (EMU) tabled by the European Commission in December 2017. Among other things, the institution recommends converting the ESM into a European Monetary Fund (EMF) (see EUROPE 11920).
The changes in question would make the EMF an integral part of the legal framework of the European Union, giving the European Parliament control over the fund’s acts. Currently, the ESM is an international organisation located in Luxembourg and steered by the Eurozone countries.
The discussions in Florence focused more on the substantive rather than institutional points of the reform. Those who took the floor echoed comments by Klaus Regling, the Executive Director of the ESM (see EUROPE 11999), who called in April for a stronger ESM but with a structure that would not necessarily change, in the definition and supervision of financial assistance programmes.
Rolf Strauch, economist in chief of the ESM, unsurprisingly defended a similar position to that of its Director. “The ESM could also play a greater role in future assistance programmes. It would design, negotiate and monitor the programmes together with the Commission”, he said.
Strauch also made the case for the ESM to become the common backstop of the Single Resolution Fund. Discussions on this point at the Council are still deadlocked (see EUROPE 11966).
Also referring to the possibility of creating a stabilisation fiscal capacity for the Eurozone, expressed in both the proposals of December and those of the multiannual financial framework 2021-2027 (see EUROPE 12013), the economist said that the ESM could play this role if there was a political agreement to this effect. On this point, he had the support of Jean Pisani-Ferry, one of the 14 Franco-German economists who authored a document on EMU reforms in January of this year (see EUROPE 11941).
This opinion was also shared by Marco Buti, the Director General for Economic and Financial Affairs of the Commission, who said that he hoped the June Eurozone summit would establish a clear timetable for several subjects, particularly the backstop and reinforcing the powers of the ESM. However, like others who spoke during the debate, Buti did not stress the need to convert the ESM into an EMF.
A European Stability Function. In Florence, several economists of the European Institute, among them Ramon Marimon, presented their recent work on the future of the EMU.
Marimon outlined a proposal to convert the ESM into a European Stability Function (ESF) which, again, would not necessarily require institutional changes to the current structure.
Among the recommendations, economists consider that the ESF could be based on long-term contracts between the body and member states willing and ready to take part in it.
The long-term contracts would guarantee that contra-cyclical policies be set in place in strong and weak economic periods. And the measures that the country would have to implement in exchange for financial support from the ESF would depend on several economic factors and would apply on an ex-post rather than an ex-ante basis, as is currently the case with ESM bailout plans.
This European Stability Function would additionally be based on sharing transfer risks, by means of issuing long-term securities, giving the structure a significant debt absorption capacity.
Link to the Marimon report: https://bit.ly/2rFjL3D . (Original version in French by Lucas Tripoteau)