Court of Audit on the ESM emergency fund

News item | 21-05-2012 | 14:58

Its concerns are set out below. The House of Representatives will debate the emergency fund's introduction with the Minister of Finance on 22 and 23 May.

Public external audit (Board of Auditors) of the ESM

The Netherlands Court of Audit has informed the Dutch parliament on several occasions in the recent past of its position regarding accountability for and the public external audit of the European Stability Mechanism (ESM).

It did so after consultation with the supreme audit institutions of other euro countries. The treaty establishing the ESM is currently before parliament for ratification. With a view to the parliamentary debate of the treaty, we have set out the Court of Audit's main concerns below.

The Court of Audit appreciates the Dutch Minister of Finance's efforts regarding the audit of and accountability for the ESM.

Intergovernmental treaty

The ESM is an intergovernmental treaty between the 17 euro countries. This means that the institutions of the EU 27 – the European Commission, the European Parliament and the European Court of Auditors – play no role in the audit of the ESM, unless laid down otherwise in the treaty. The European Commission has a specific role but the European Parliament cannot exercise democratic control of the ESM. The role of the European Court of Auditors is limited to the public external audit of the EU budget. The ESM is not part of the EU budget. The national parliaments of the 17 euro countries are responsible for democratic control of the ESM.

Euro countries guarantee the ESM

The ESM will total €700 billion, representing an effective lending capacity of €500 billion. The ESM will raise the greater part of its funds on the capital market. The remainder will be contributed directly by the participating countries. The 17 euro countries – and ultimately their citizens – will guarantee the loans granted by the ESM. If a country cannot repay a loan it has received, the ESM will call in the guarantees. The Netherlands is guaranteeing more than €40 billion of the ESM and contributing €4.6 billion directly.

Public external audit by the Board of Auditors

The Board of Auditors established for the ESM (the ESM's 'audit office') has five members, two of whom are appointed by the supreme audit institutions of the 17 euro countries and one by the European Court of Auditors. The Board is the only body that can give an independent and transparent insight into the actual outcomes of the support programmes funded from the ESM (i.e. into the regular and effective use of funds). The internal audit and external control provided for in the treaty cannot provide such an insight.

The Board of Auditors' mandate, composition and procedures are laid down in part in the treaty. The participating countries are currently negotiating by-laws, which will, inter alia, include further agreements on the Board of Auditors.

The Court of Audit would draw particular attention to the following two points:

1. The treaty does not explicitly lay down what types of audit the Board can carry out and on what grounds. The Court of Audit recommends that the by-laws provide the Board with a broad mandate, including the power to audit the regularity, policy compliance, effectiveness and risk management of the support programmes funded from the ESM in accordance with international audit standards.
2. The treaty lays down that the Board of Auditors will report once a year to the Board of Governors (the finance ministers of the 17 participating euro countries). The Court of Audit thinks this restriction on the Board of Auditors' publication opportunities is undesirable. The by-laws should lay down that the public annual report contain at least the conclusions and recommendations arising from the Board's audits. It would also be advisable to include the Board of Governors' response to those conclusions and recommendations. The annual report will, of course, be made available to the national parliaments, which are responsible for democratic control of the ESM.

What happens next?

The Dutch Minister of Finance is also a member of the Board of Governors. When the treaty comes into effect, the Board of Governors will adopt the by-laws. The Dutch parliament can hold the Minister of Finance to account for the inclusion of the above points in the by-laws.