Economists at the European Stability Mechanism (ESM), the euro area’s permanent rescue fund, believe that the ESM is best placed to set up a fiscal capacity for the euro area that would provide loans to one or more States facing an asymmetric macroeconomic shock.
With a budget of €250 billion, the fund would provide loans with a maturity of 10 years, which for the first 3 years would not be subject to interest or fee repayment so as not to hamper recovery in the recipient country. For each activation, the aid allocated could not exceed 4% of a requesting country’s GDP.
Any request for financial assistance would be subject to an analysis by the ESM and the European Commission, in accordance with the procedures in force for standard ESM assistance plans. The beneficiary State, which must not be subject to a procedure for excessive macroeconomic imbalance, will then be required to undertake to utilise the loans received for budgetary stabilisation purposes.
According to ESM economists, fiscal capacity would be easier to implement than other proposed financial instruments (‘revolving fund’ ‘rainy day fund’) and would not require new financial contributions from euro area countries. Furthermore, it would work against moral hazard, as recipient countries would bear the costs of the loans to be repaid and other lending countries would only bear the costs of the government guarantees provided.
However, the authors recognise that further work on fiscal capacity is needed to address the issue of investor stigmatisation of a country using it. They note that the budgetary credit line set up within the ESM to deal with the Covid-19 pandemic was never activated, partly because the euro area countries that were suffering did not want their reputation on the markets to be harmed by it (see EUROPE 12483/1).
See the ESM proposal: https://aeur.eu/f/1mo (Original version in French by Mathieu Bion)