The European Stability Mechanism (ESM) is a permanent crisis-resolution body for the euro area, headquartered in Luxembourg. It was established by an intergovernmental treaty signed by the 17 then-euro-area member states in February 2012 and entered into force in September 2012, taking over the role of the temporary European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).
The ESM raises funds by issuing bonds and other debt instruments on capital markets, backed by subscribed capital from euro-area members. Its lending capacity is €500 billion. Assistance is conditional: a country requesting support must negotiate a Memorandum of Understanding (MoU) setting out macroeconomic adjustment or sector-specific reforms, typically prepared together with the European Commission, in liaison with the European Central Bank and, historically, the International Monetary Fund — the so-called "Troika" arrangement.
ESM instruments include:
- Loans under a macroeconomic adjustment programme
- Precautionary credit lines (PCCL and ECCL)
- Primary and secondary market bond purchases
- Indirect and direct bank recapitalisation
- Loans for the specific purpose of bank recapitalisation
Countries that have received ESM or EFSF assistance include Ireland, Portugal, Greece, Spain (for bank recapitalisation), and Cyprus. Greece's third programme (2015–2018) was financed by the ESM.
Governance rests with a Board of Governors composed of euro-area finance ministers, which takes major decisions typically by mutual agreement, and a Board of Directors handling operational matters. Voting weights reflect capital contributions; Germany, France and Italy hold the largest shares.
A 2021 treaty reform expanded the ESM's role, notably by making it the common backstop to the Single Resolution Fund within the Banking Union and strengthening its role in designing and monitoring future programmes. Ratification of that reform was delayed; Italy was the last signatory to withhold parliamentary approval, with its parliament rejecting ratification in December 2023.
Example
In August 2015, the ESM approved a third financial assistance programme for Greece of up to €86 billion, conditional on reforms agreed with the Tsipras government.
Frequently asked questions
The ESM lends only to euro-area states and is funded by member capital and bond issuance, while the IMF is global and funded through member quotas. The two have co-financed several euro-area programmes.
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