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The ESM and the importance of independent audits

Intensive talks are currently taking place in the EU about the way in which financial support could be offered to countries hard hit by the corona crisis.

One of the options under discussion is the use of the European Stability Mechanism, the ESM. This is an emergency fund that was created for eurozone countries at the height of the financial crisis in 2012. The idea was that the fund would provide financial stability in the eurozone during the crisis. At the time of its foundation, the ESM had a lending capacity of €500 billion. According to Klaus Regling, the ESM’s managing director, there was still a sum of €410 billion available at the end of March.

Together with national audit offices from other eurozone countries, the Netherlands Court of Audit has kept a close eye on the ESM ever since its creation in 2012. We felt this was important given that the ESM is not subject to the usual EU mechanisms for democratic control and accountability as apply to the customary forms of EU expenditure. This is because the ESM stems from a separate treaty signed exclusively by the eurozone countries. As a result, neither the European Parliament nor the European Court of Auditors is involved in establishing whether money from the fund has been well spent and whether it has achieved its intended purpose.

Particularly in view of the massive amount of money held in the ESM and the vital importance of ensuring that the fund operates properly, it is important for the fund to be as transparent as possible and for proper audit and accountability procedures to be put in place. An independent, external audit is a vital link in this chain.

At the time when the ESM treaty was signed in 2011, the national audit offices joined forces in pressing for full attention to be given to the issue of external audits of the ESM. This led to the creation of an independent Board of Auditors the workings of which were regulated in the by-laws of the treaty. The Board of Auditors operates as a sort of independent audit office.

We have looked at the operation of the Board of Auditors in a number of audits since then. There are two recurring issues in this respect, about which we had the following to say in our 2015 audit report entitled Emergency assistance for eurozone countries during the crisis: firstly, the Board of Auditors has failed to make full use of its audit powers, given that it has not audited the efficiency and effectiveness of ESM expenditure and, secondly, the Board of Auditors does not have sufficient staff capacity and resources to undertake this type of in-depth audit.

To start with the latter point, according to a letter that the Dutch Minister of Finance sent to the Dutch House of Representatives on 26 June 2019, the ESM’s Board of Auditors feels that it has enough staff and resources to carry out its responsibilities. Reassuring though this may be, it is worth bearing in mind that the audits performed by the Board of Auditors to date have been limited in scope.

The ESM’s by-laws accord the Board of Auditors a wide range of responsibilities. In addition to examining financial regularity, compliance with rules and regulations, and risk management, it is also required to audit the effectiveness of expenditure. In practice, however, we found that the Board’s prime focus to date has been on financial data and internal processes. It has failed to answer the vital question of whether the emergency assistance provided by the ESM to Greece, Spain and Cyprus has had any effect. On the other hand, the ESM’s Board of Governors, i.e. the Ministers of Finance of the eurozone countries, appointed an independent evaluator of their own, who published a report in 2017.

As the letter from the Minister of Finance referred to above makes clear, the Board of Auditors does not believe that it has a role to play as an evaluator, since the ESM has already appointed an independent evaluator and it does not wish there to be any duplication of activities.

This is a curious standpoint to adopt. The reason why the national audit offices argued so strongly, at the time when the ESM was created, in favour of an external auditor is that democratic principles require the spending of public money to be subject at all times to an independent, external audit. While the ESM is to be commended for taking an interest in the results of its activities (by appointing an evaluator), this interest cannot in any circumstances replace an external audit. Just as the ESM’s internal audit of its financial flows does not render the Board‘s work unnecessary.

It is only logical that, in performing its task and partly for reasons of efficiency, the Board of Auditors should take account of activities already performed by the ESM in this connection. There is no need for the Board to repeat an evaluation already performed in the past. However, what it could do in such a situation is to assess the quality of the evaluation.

Once again, the ESM finds itself at the centre of public attention. As in the period after 2012, it may well again perform a vital role. Since the ESM’s creation, the Netherlands Court of Audit has taken a keen interest in democratic control and accountability. This interest is still needed today, even at a time of crisis.