Decision-making European emergency funds

Decisions on the European emergency finds are taken by the Eurogroup (the 19 member states in the eurozone) and by the EU 28 (all EU member states together). The Eurogroup takes decisions on:

  • Greek Loan Facility (GLF)
  • European Financial Stability Facility (EFSF)
  • European Stability Mechanism (ESM)

The EU 28 take decisions on:

  • European Financial Stability Mechanism (EFSM)

Greek Loan Facility (GLF)

The Eurogroup finance ministers take decisions unanimously on the establishment of the facility. They then mandate for the European Commission to negotiate with Greece on the content of the Memorandum of Understanding (MoU) and the Loan Facility Agreement. The MoU lays down the conditions that the euro countries attach to the emergency support: how much, when and where Greece will cut public expenditure, the privatisation of state enterprises and reforms in social security, pensions and employment contracts. The parties to the Loan Facility Agreement (LFA) (the European Commission on behalf of the euro countries, and the Greek government) commit themselves to the agreements. The first payment can be made once all parties have signed the documents. The European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB) periodically review the implementation of the recovery programme and report their findings to the euro countries. The Eurogroup evaluates compliance with the agreements and takes a unanimous decision on the disbursement of further tranches. At the request of the Eurogroup's president, the European Commission then makes the payment through the ECB.

European Financial Stability Facility (EFSF)

The Eurogroup takes decisions unanimously on the establishment of the facility. The Board of Directors of the EFSF then takes a formal decision. The euro countries mandate the European Commission to negotiate the content of the Memorandum of Understanding (MoU) with the euro country in difficulties. The European Commission conducts the negotiations in consultation with the European Central Bank (ECB) and the International Monetary Fund (IMF). The Eurogroup Working Group (EWG) must then approve the MoU, unless it has been agreed as part of the European Financial Stability Mechanism. The MoU lays down the conditions that the euro countries attach to the emergency support, including conditions on budget reforms the recipient euro country must make. The first payment can be made when the MoU is signed. The European Commission and the ECB periodically review the implementation of the recovery programme and report their findings to the EWG. The EWG evaluates compliance with the agreements and conditions and takes a unanimous decision on the disbursement of further tranches. The Board of Directors of the EFSF then prepares a payment proposal, on which the EWG decides. The EFSF makes the payment at the request of the president of the EWG.

European Financial Stability Mechanism (EFSM)

The finance ministers of the 28 EU member states decide in the Ecofin Council by qualified majority on the disbursement of emergency support from the EFSM. In broad lines the same procedure is followed for the Balance of Payment programme; this programme is not considered separately here. Before Ecofin takes a decision, the European Commission discusses the financing requirements with the country in difficulties and makes proposals to the Economic and Financial Committee (EFC) of the Ecofin Council. When the Ecofin Council has taken a decision on the support, the European Commission negotiates the Memorandum of Understanding (MoU) with the country concerned. The MoU lays down the conditions that the country receiving support from the EFSM must satisfy. The agreements relate to, amongst other things, budget policy and labour market policy. Every six months, the European Commission and the European Central Bank (ECB) together determine whether the economic recovery programme needs adapting. If so, the European Commission puts a proposal to adapt the programme, via the EFC, to the Ecofin Council. The Ecofin Council then takes a decision by qualified majority. The European Commission periodically reviews the progress of the recovery programme and decides on the disbursement of further tranches.

European Stability Mechanism (ESM)

The Board of Governors (BoG) of the ESM, consisting of the finance ministers of the 18 eurozone countries, decides on the provision of support. The European Commission, the European Central Bank (ECB) and, where possible, the International Monetary Fund (IMF) then negotiate the Memorandum of Understanding (MoU). The MoU lays down the conditions that the country receiving support from the ESM must satisfy. The agreements relate to, amongst other things, budget policy and labour market policy. The BoG approves the MoU. The managing director of the ESM then makes a proposal to the BoG for the Financial Assistance Facility Agreement (FAFA). The BoG adopts the FAFA, after which the first payment can be made. The European Commission, the ECB and, where possible, the IMF periodically review the implementation of the recovery programme and report their findings to the Board of Directors (BoD) of the ESM. The BoD evaluates compliance with the agreements and conditions. On a proposal by the managing director of the ESM, the BoD decides on the disbursement of further tranches.

Evaluation of EFSF and ESM aid operations

The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) were established in 2010 and 2012 in order to provide financial aid to member states in the euro zone that were in economic difficulties. The EFSF was a temporary facility that was succeeded in 2012 by the ESM, a permanent bailout fund.

On 15 June 2017 an independent evaluator appointed by the President of the ESM’s Board of Governors presented an evaluation report on the aid programmes that had been implemented between 2010 and mid-2016 at a cost of approximately €300 billion. Aid programmes had been implemented for Ireland, Portugal, Spain, Cyprus and Greece (up to the second programme). The evaluation covered the relevance, effectiveness and efficiency of the aid provided from the EFSF and ESM.

The evaluation report concluded that:

  • the establishment of the two funds had been essential for the financial stability of the euro zone;
  • the funds had carried out their mandates effectively;
  • the sustainability of public finances and the economic structure had improved in all countries that had received financial support from the aid programmes.

As well as a number of points for consideration, the report included six recommendations. Two of the recommendations were that the programme structure should have clear goals and priorities and that problems in the financial sector should be addressed immediately by means of programmes that provide financial support in phases based on the progress made. The latter was already being implemented in the aid programmes for Greece.