Treaty establishing the European Stability Mechanism.
Signatories: the 17 Eurozone Countries
Signed first on 11th July 2011 by Ministers for Finance in Brussels
Amended, signed again 2nd February 2012 by Ambassadors in Brussels
Eurozone governments have agreed 1st July 2012 as date for entry into force
Comes into force when ratified by Eurozone Countries representing 90% of capital stock payable to ESM Institution (Ireland’s share will be 1.59%)
Will not bind Ireland unless ratified by Ireland
Government will ratify without a referendum
Not yet ratified by Ireland
The ESM Treaty is an international legal agreement made between the 17 countries whose currency is the euro. Like the Fiscal Treaty, the ESM Treaty is not an EU Treaty. The ESM Treaty will establish an independent financial institution. This will have a Board of Governors (the Finance Ministers of its Member countries), a Board of Directors, a Managing Director and a Board of Internal Auditors. It will be based in Luxembourg and will have an office in Brussels. The ESM Institution will be a permanent body
The ESM Institution is designed to build up a fund comprised of capital contributions paid in by its Members, combined with funds the Institution will borrow on the money markets, or from Members, or from financial institutions and other third parties. The stated purpose of the Institution will be ‘to safeguard the financial stability of the euro area as a whole and of its Member States’. For this purpose the Institution may provide loans and other forms of financial assistance to Member countries subject to strict conditions. The Institution may also grant loans to a Member country to re-capitalise the financial institutions of that country.
The amount of capital which the Institution may raise from its Members is €700 billion. Each Member country’s percentage contribution to this capital is set out in Annex I to the Treaty. Ireland percentage is 1.5922%. Annex II lists the amount of capital which each Member country may be required to pay. The figure for Ireland is over €11 billion (€11,145,400,000).
Voting rights for each country are allocated in the same percentage as authorised capital. Ireland’s voting rights therefore are 1.5922% provided it has made all its capital payments up to date.
The Treaty provides that the total amount of capital to be paid in initially by the Member countries will be €80 billion. Ireland’s share of €80 billion will be €1.27 billion. The Treaty says that each Member country will be obliged to pay its share of the initial capital in five equal annual instalments.
The Treaty also says that the Institution may decide to accelerate these instalment payments. It would appear that a decision to this effect has already been taken, even though the Treaty has not yet been ratified and so is not yet in force. According to a Statement of the Eurogroup (Finance Ministers of Euro countries) dated 30th March 2012, the plan now is that Member countries will pay their initial capital in five instalments over a two year period instead of a five year period. These instalments will be payable in July and October 2012, two more in 2013 and one in the first half of 2014. The Statement also says that payment of the initial capital may be further accelerated.
The Board of Governors can decide by mutual agreement to call on and require each Member country to make further payments of capital over and above the initial €80 billion as the need arises. They may do this by calling on each Member country to pay in more of its share of the authorised capital stock (as set out in Annex II). The Board of Directors may call this in by simple majority to restore the level of paid-in capital, if that has been reduced by losses.
If a Member country fails to repay loans from the Institution leading to losses, then the other Member countries may be required to make additional payments of capital to cover the losses.
If there is a risk that the Institution itself might default on its borrowings, then there is an emergency procedure whereby the Managing Director may call in more of the authorised capital stock from the Member countries.
While the initial €80 billion of capital stock will be sold to the Member countries at par (face value), the Governors will have power to change the price of stock issued subsequently. Decisions on this will be made by mutual agreement. If this happened, it could have the effect of increasing the cost to Ireland of its contributions to the capital stock above the figure contained in Annex II.
The Governors will also have power by mutual agreement to decide to increase the total amount of authorised capital stock. Any increase is then allocated to each Member country in the proportions set out in Annex I. Any such increase will only come into effect when every Member country has notified the ESM Institution of the completion of its applicable national procedures.
Each Member country is obliged to pay for any capital call made by the Institution. A country that fails to pay any capital contribution when required to do so will lose its voting rights in the Board of Governors and in the Board of Directors for as long as the amount due remains unpaid.
The Treaty says that the Member countries irrevocably and unconditionally undertake to pay their contribution to the authorised capital stock when called on to do so. These unconditional and irrevocable commitments will be essential to underpin the ESM Institution’s capacity to borrow.
Member countries will be eligible to apply to the Board of Governors for loans and other forms of financial assistance. Applications will be considered in conjunction with the EU Commission and the ECB, and also ‘if possible’, the IMF. Loans or other forms of assistance will be subject to ‘strict conditionality’ and dealt with by way of Memorandum of Understanding. It will be a precondition of any application for financial assistance that the applicant country has already signed up to the Fiscal Treaty.
When the ESM Treaty was amended in February 2012, an additional recital was inserted into the text. This says that it is acknowledged and agreed that new financial assistance under the ESM Treaty will be conditional after 1 March 2013 on the applicant country having ratified the Fiscal Treaty.
The Institution will take over the management of the existing temporary EFSF (European Financial Stability Facility) fund until this is run down. The ESM Treaty sets out transitional provisions in this regard.
The ESM Institution will be an independent legal entity with legal immunity so that it will not be subject to regulation under the laws of any state or the EU. The European Court of Justice will have a limited role in determining certain disputes arising under the Treaty. The Institution shall not be liable to pay any taxes to any country. Similarly the employees of the ESM will pay no taxes in any country but the ESM will have power to levy an internal tax on its employees payable to the ESM Institution itself.
An explanatory Guide to each of the Articles in the ESM Treaty can be found in the page ‘ESM Guide’