The ESM Treaty Reform

ESM contributors


Michele Corio

Michele Corio

In December 2018, the European Council launched a project for the ESM reform. The ESM (European Stability Mechanism) reform aims to increase its functions. The ESM will have an important role in pursuing a greater economic convergence among Member States to increase their competitiveness. Moreover, it will be involved in the framework of the European banking union.
The debate between the governments of EU countries on the reform lasted for years, mainly because of Italy’s veto from December 2019. Finally, an agreement was found and the Italian parliament gave the green light to the reform on 9 December 2020.

A lot of misleading news has circulated about the ESM reform. Some said that it would allow German banks to recapitalise with money from other European countries, or that it would force Italy and other countries to restructure their debt.  None of these statements is true. Moreover, this reform does not change anything about the ESM pandemic crisis support for health care spending during the pandemic.

ESM memes
ESM memes

Actually, the ESM reform concerns:[1]

  • A new role for the ESM as lender of last resort (Backstop mechanism) to the European banking Single Resolution Fund (SRF) in case of a banking crisis. The SRF is still under construction, it should be completed within 2024 and should have an endowment of about 55 billion: 1% of credit institutions’ protected deposits in the banking union. The fund will be directly financed by the banking sector and will intervene in the resolution of failing banks, if there are still creditors left to pay, after all other options have been exhausted (bail-in). (See the article Banking Union: A Step For More Stability for more information)

In the future, if the Single Resolution Fund is called to intervene in a banking crisis and its capital endowment is not sufficient to cover the needs, the SRF will be able to borrow money from the ESM.

The ESM will have up to 68 billion euro available to finance the SRF and these loans to the SRF will have to be repaid at most within 5 years.

The interventions of EU institutions through the SRF and, when necessary, the ESM in a banking crisis seek to avoid that the failure of a bank endangers the entire European banking system. They represent a European risk management tool, created with the objective of protecting all the EU countries from financial crises. They do not favour one state at the expense of another.

  • Changes to the monitoring roles of the EU institutions in case of ESM intervention in support of a state. The European Commission will be mainly responsible for monitoring the consistency of the economic policy measures implemented by the State and for assessing the sustainability of the debt and the macroeconomic framework in general.

The ESM, on the other hand, will monitor the capacity of member countries to finance themselves on the market and potential risks. It will also assess, during the intervention period, the risk that the assisted country will not be able to repay the loans received.[2]

  • Simplification of the requirements to access the Precautionary Credit Lines (PCCL). A State applying for support from the ESM through the Precautionary Credit Lines and fulfilling all the requirements will no longer need to sign a Memorandum of Understanding with the EU Commission and the European Council. It will suffice a letter of intent from the state, expressing its commitment to maintain the economic conditions that allowed it to access the credit line without enhanced conditionality during the ESM intervention period and in the future.
  • Changes to the Collective Action Clauses (CACs). CACs are clauses that allow a decision on a debt restructuring to be approved by a qualified majority of creditors. The debt restructuring is a modification of the initial conditions of a loan (interest rate, maturity, principal, etc.) that softens the debtor’s condition, increasing the probability that the loan is at least partially reimbursed. The reform establishes single limb CACs, clauses with single majority approval. So, it will be possible to approve a decision on debt restructuring with a single resolution of debt holders for all series of a given security, without the need to vote for each individual series issued.

However, this does not mean that the ESM reform imposes debt restructuring on member states as a condition for financial assistance. Debt restructuring is a rare and extreme event, usually carried out by countries close to bankruptcy. A decision to restructure even a portion of a country’s public debt would have dramatic effects on all public debt issues of the country. It would greatly increase the riskiness of the debt and, thus, the interest charged by investors (cost of debt), causing the market value of the securities to plummet.

The ECB holds a large share of Italian government debt, a large share is also held by banks, insurance companies and other financial institutions. Dramatically devaluing these government bonds would generate a crisis for the entire European Union, exactly the opposite of the objective for which the ESM was established. [3]

This amendment was introduced to improve the decision-making process in the case of restructuring by reducing uncertainty about the modalities and timing, not to make it more likely. In case restructuring becomes unavoidable, the absence of a clear and defined procedure may further increase the costs for all parties involved.

Michele Corio


[2] especially section “What will be the ESM’s new tasks in future financial assistance programmes?”



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