Eurogroup approves changes to ESM rescue fund

LONDON – Eurozone finance ministers have agreed to bolster the region’s crisis rescue fund – a long overdue measure that addresses how investors view the region.

The 19-member zone is often criticized for failing to address disparities between its economies. Differences between countries in the South, which tend to have high levels of public debt, and the more fiscal hawkish countries in the North, caused tensions when the euro area tried to resolve its sovereign debt crisis by 2010.

The finance ministers of the bloc took a key step on Monday to bridge these differences.

They agreed that the European Stability Mechanism, created in 2012 to provide funds to countries in need of bailouts, should play a greater role in the design and implementation of future rescue programs – a task shared by the European Commission, the European Central Bank and the International Monetary Fund. at the height of the debt crisis.

Talks have been stuck on this issue for a year, given political and financial differences between countries, but the initiative is expected to receive approval from national parliaments next year.

The move could reassure investors who are worried about financial gaps between euro area countries and the risks they could pose for their investments.

“It was really difficult,” said Paschal Donohoe, who chairs the meetings of the 19 ministers.

The euro region is facing a deep economic crisis due to the coronavirus pandemic. It could also pose risks to the region’s banking system.

In addition to playing a larger role in future bailouts, the latest agreement allows the ESM to serve as a backstop for the Single Resolution Fund, which supports troubled banks in the euro area. This safety net will be made available in 2022, two years earlier than initially planned.

“The safety net is a last resort, it is an extra safety net available to us if we need it,” Donohoe said.

“It will strengthen and complement the resolution pillar of the Banking Union and help ensure that a bank failure does not harm the economy as a whole or cause financial instability.”

The Eurozone Banking Union aims to make its banking system stronger and better supervised. This has been a problem in the past when the global financial crisis raised concerns about the risks of contagion from one euro area country to another.

The plan approved by ministers this week includes other steps, including negotiations for a European deposit insurance scheme, which would protect deposits from retail banks across the region. However, this remains a politically sensitive issue, with some countries fearing it could endanger their taxpayers when a bank in another eurozone country collapses.

Paolo Gentiloni, the European Commissioner for Economic Affairs, said the region “is not at the end of this road”, suggesting that more work needs to be done to complete the banking union.