Luxembourg A kicker is still missing in the light-flooded rooms of the ESM euro rescue package in Luxembourg’s financial district. But even so, the open spaces with the colorful armchairs are reminiscent of a start-up. Employees like to say that their employer ticks differently than other authorities. So does the deputy head of department Paolo Fioretti: “The ESM was founded as a start-up and we still have this spirit.”
Similar to other young companies, the founder plays a prominent role: the number one employee is the boss Klaus Regling, just called “Klaus” by everyone and always approachable. Chief economist Rolf Strauch carries the ID card with the number two. Fioretti is number 38 and therefore one of the founding year. He joined the euro rescuers after many years of experience in the financial sector in Milan and London.
Unlike most start-ups, the ESM was actually founded ten years ago to save the world – or at least the euro zone. The three letters ESM stand for European Stability Mechanism. At that time, when international investors were betting on the collapse of the currency union, the rescue package with its lending capacity of 500 billion euros formed a firewall against speculators. A total of five euro countries – Greece, Ireland, Portugal, Spain and Cyprus – were kept afloat by the ESM and its temporary predecessor, the EFSF, with cheap loans when market access was blocked for these countries.
On the occasion of the tenth anniversary, an era is coming to an end: Not only is the 71-year-old Regling stepping down in October. The organization, which has grown to 250 employees, is also looking for new tasks – and a new image. Few institutions have such a bad reputation as the ESM: for its critics in the north, the acronym stands for billions in loans to debtor countries, while in the south the ESM is associated with tough austerity targets.
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Therefore, Regling’s successor will have to come up with something. Since the end of the euro crisis, things have gone quiet about the rescue package, and no new loans have been called down since 2015. The stigma attached to the name is too great. That became all too clear at the beginning of the corona pandemic: Although the ESM offered cheap credit lines for health investments, no euro country took advantage. Governments preferred to wait for help from the EU Commission.
Sebastian Mack from the Jacques Delors Center in Berlin is not surprised. “Once a country taps into the ESM, it’s branded in the financial markets,” he says. An application sends the message that there is no more credit from anywhere else. That is why the ESM is a “red rag” for many euro countries.
Eurogroup is looking for a new ESM chief
The institution now has to cope with two upheavals: On the one hand, there is the departure of the father Regling. The 19 euro finance ministers who make up the ESM supervisory body are currently looking for a successor. At the Eurogroup meeting on Monday, the number of candidates was reduced from four to three after a first non-binding test vote: the Netherlands withdrew their candidate.
The Italian EU officials remain in the running Marco Butithe Portuguese ex-finance minister Joao Leao and the Luxembourg ex-finance minister Pierre Gramegna. The federal government wants to enforce the Luxemburger at all costs. Since Germany with 26.9 percent of capital contributions a has a blocking minority, Finance Minister Christian Lindner could use his veto to prevent any other candidate. A decision should be made by mid-June.
The second decision the employees in Luxembourg are waiting for is the ESM reform. This was decided long ago, but is still pending ratification in two countries: Germany and Italy. Italy’s approval is particularly questionable because the two largest parties in Mario Draghi’s broad governing coalition, the populists from Lega and Five Stars, reject any increase in power for the ESM.
Germany is committed to succeeding Regling in Luxembourg’s Pierre Gramegna.
(Photo: dpa)
The reform would give the ESM important new competencies. Above all, it should serve as a safety net for the European bank resolution fund SRF (Single Resolution Fund). With a target capital of 70 billion euros, the SRF would be too weak to cope with a major bank failure. In an emergency, the ESM should be able to grant loans to the SRF in the future. This backstop is “operationally ready,” says the responsible ESM manager Fioretti. There have already been several successful trial runs.
Expert Mack thinks this new function of the bailout makes sense. “It cannot be ruled out that we will still experience a banking crisis,” he says. “For that alone, it is reassuring to know that the ESM exists. Because the SRF is too small.”
The core task of the ESM, its role as the fire brigade of the euro zone, remains as important as before. After all, interest rates on some southern European government bonds are already rising again. Should there be a new euro crisis, the rescue package would be ready this time: the euro zone can jointly borrow money at the most favorable conditions via the ESM. It can then pass it on to countries in need in the form of loans. The recipients save interest and can repay the long-term loans.
The euro states have paid around 80 billion euros into the ESM as share capital. In addition, they have undertaken to inject a further 625 billion euros if necessary. A total of 705 billion euros in capital is available. This ensures that the ESM can pay out loans of around 500 billion euros to countries in need.
Some of the loans granted so far will run for a few more decades – in the case of Greece until 2070. The employees in the Luxembourg trading floor are busy investing the ESM’s capital and refinancing the loans. By being constantly active in the market, they are in close contact with investors and get a feel for how the euro zone is perceived in the world.
ESM is looking for new tasks
Regling, for example, has just returned from a visit from investors in Singapore and was able to brief the euro group on Monday. “We bring the perspectives of investors from Asia, Latin America, the USA,” says ESM Secretary General Nicola Giammarioli. “These are very important insights for euro zone ministers.”
Recently, however, it seemed as if the ESM’s role as the euro zone’s fire brigade was no longer enough. Instead, economists are increasingly getting involved in the economic policy debate with their own proposals. “We take part in the political debate on issues directly related to the functioning of the monetary union,” Giammarioli justifies. That is part of the mandate.
Last fall, ESM economists caused a stir when they called for the Maastricht debt ceiling to be raised from 60 to 100 percent of gross domestic product. The background: After the corona pandemic, the average debt ratio in the euro zone was more than 90 percent, and compliance with the Maastricht criteria seems unattainable for several heavily indebted countries. The ESM proposal was quickly rejected, instead the reform of the EU debt rules is likely to be less radical.
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At the beginning of May, the ESM spoke again – this time with the proposal to set up a 250 billion euro stability fund. “Such a stability fund could provide additional financing to countries hit by a significant asymmetric shock if national fiscal space is insufficient,” explained Regling. He cited a pandemic, a war or a natural disaster as examples. Such a fund is compatible with the ESM mandate, emphasized Regling. In addition, they have sufficient lending capacity and more than ten years of experience in crisis management.
In Berlin, the advance from Luxembourg was immediately rejected. The ESM is not there for general economic policy challenges, said Finance Secretary Florian Toncar (FDP). The fire brigade is also not responsible for urban development.
However, these debates show that the rescue fund, which was born out of necessity, has not yet found its final role. At that time it was founded as an intergovernmental organization of the euro countries. Some would like to make it an EU agency in the long term. EU Monetary Affairs Commissioner Paolo Gentiloni said on Monday that the ESM had played a crucial role over the past ten years. He would find it interesting if the bailout would have a “full EU dimension” in ten years.
The idea of further developing the ESM into a kind of monetary fund or EU debt agency is popular in Brussels because the institution would then no longer be under the authority of the 19 euro governments, but of the EU Commission. According to expert Mack, this would have the advantage that the various EU bailout funds could be made more coherent.
However, there is also a clear no from Berlin. The federal government wants to limit the ESM to what it is – the fire brigade for crises. No more and no less.
More: The ESM is proposing a €250 billion stability fund