FES BRIEFING REFORMING THE ESM AND AVOIDING A SURGE IN NATIONAL DEBT Andrea Boitani December 2020 EVERYONE WANTS SURE, NO ONE WANTS THE ESM The Coronavirus pandemic is leaving a momentous mark on the European economy and thus on the living standards – not to speak of the health – of millions of people. To mitigate these effects, and the associated growth of inequalities and poverty risks, European governments have repeatedly launched finan­cial support measures for the worst-hit people and firms, and on an enormous scale. After some initial hesitation, the Euro­pean Union has also set to work, coming up with provisions of unprecedented dimensions and characteristics. The SURE (Support to mitigate Unemployment Risk in an Emergency) programme has set aside 100 billion euros in special low inter­est loans to fund unemployment benefits and other measures put in place by member states to shore up the incomes of the self-employed. Of the 90 billion euros already approved by the Council, 31 billion euros were handed over on 16 November to the ten countries that had applied for it immediately, includ­ing Italy, Spain, Poland and Greece. To fund this, the Commission issued ten- and twenty-year bonds worth 17 billion euros on 21 October. Market demand topped 221 billion euros, more than 13 times the available supply. SURE is thus a financial and political success story. It has demonstrated that:(i) there is considerable appetite for European»safe assets« and thus that shared European debt is not only possible, but also welcome in market terms;(ii) mem­ber states are eager to apply for loans from the European Un­ion, within the framework of a programme built on reciprocal trust and shared guarantees. All this would seem to be a good omen for the success of the vast Recovery and Resilience Facil­ity(RRF), unless EU budgetary vetoes by Poland, Hungary and (perhaps) Slovenia derail the whole programme. The European Stability Mechanism(ESM) has not met with similar success. On 9 May 2020 up to 240 billion euros, of the 410 billion euros still available, was set aside for funding di­rectly and indirectly concerned with Covid-19-related preven­tion and cure, up to a maximum of 2 per cent of each nation’s GDP. Despite extremely easy conditions not tied to macroeco­nomic adjustments(even though this was a requirement of the ESM’s founding charter), no European nation has, as yet, applied for the ESM»health« funds. The ESM tool would seem to have become politically»untouchable«. REINVENTING A TOOL(MISTAKENLY) RE­GARDED AS TOXIC Governments willing to resort immediately to the RRF – whose prerequisites are much more stringent than those of the health ESM – are mistaken in their belief that ESM loans are politi­cally toxic, even though their costs are lower than»national« debts. They are wrong but, to be fair, so is everyone else. And this makes it difficult to change their minds. The mistake is due partly to the stigma attached to the very act of resorting to a tool which, it should be remembered, was originally designed to rescue states that had lost access to the market during the sovereign debt crisis. An element in this is fear of what hap­pened to Greece in its struggle against the widely forecast interference of the»troika«(IMF, ECB and European Commis­sion) in its economic policy choices after it applied for assis­tance, first from the European Financial Stability Fund(EFSF) and then from the ESM. Part of the blame for this is the ESM itself, which is outside the European Union’s legal framework – because of UK opposition – and fruit of the intergovernmental logic that prevailed in the wake of the financial crisis. A power of veto was granted to individual member states or, at least, minority blocks. As Lucas Guttenberg, deputy director of the Jacques Delors Centre has written, 1 »the fact that the ESM is seen as a mechanism that is controlled by a handful of mem­ber states that will likely never use it is precisely what renders the ESM politically unviable«. Reform of the ESM, which began long ago but was never completed – partly as a result of the Italian veto on certain clauses that would have made sovereign debt restructuring 1.»Time to come home: If the ESM is to stay relevant, it should be reinvented inside the EU«, 12 November 2020, https://www.delors centre.eu/en/publications/detail/publication/time-to-come-home. 1