The Involvements of the EFSF/ESM

The creation of EFSF and ESM was thanks to an unprecedented show of political will and innovation. As global financial turmoil caused tremors that would shake the new Euro, as well as the sovereign a sovereign debt crisis in Europe, investors became more and more sceptical and pressed ever-low prices to buy the sovereign debt of countries. The interest rates on these debt payments crippled the national budget. Amidst this challenge of economic willpower, the euro area erected a firewall. Beginning with the temporary EFSF and following with its permanent successor, the ESM, the institutions were tasked with holding the euro.  The institutions were able to tap financial markets and provide rescue funding for 5 of the 19 euro area members. Despite that, for example, the collapse of Lehman Brother had Greece suffer a fiscal deficit as it faced high market pressure and faltering economic independence from the Eurozone. 

A debate, therefore, arises concerning the effectiveness of the ESM as it intervened in between crisis. Judging from past events, this paper will briefly analyse the extent to which the ESM has successfully assumed its role as a firewall to European economic crises. It will consider the EFSF/ESM’s involvement in the Greek and Spanish crisis, as well as look at the foundations of the EFSF and the role this institution plays alongside the Troika.

Coming into this paper, my opinion was fixed that the involvement of the ESM/EFSF was highly ineffective.  Here are the reasons:

1. The first predominant reason is the EFSF’s efforts during the Greek crisis – its attempt to restructure the severe, concerning debt crisis that Greece faced was unsustainable, and therefore required more-than-necessary inputs of aid to restore the failing economy. Europe’s rescue programmes were essentially consisted of short-term lending at elevated rates, that which intended to spur aid recipients into quickly reinstating sound monetary and fiscal polices, so that they could return to market financing that would be cheaper than rescue loans. Yet despite this, for example, in 2013, the EFSF had to make several disbursements to Greece totalling €25.3 billion. Although this financial aid was met with short-term Greek economics success, the lack of supervision of the EFSF had the fragile economy stumble under the weight of political turmoil and a 6-year recession. Considering this, it seemed the the only aid provided by these firewall institutions was confined to financial aid. The integral aspect of pursuing structural economic  reform was not tackled through their involvement. The EFSF’s actions, in this case, were belittled by Greece’s unexpected turmoil and therefore fell short for supporting the economy.
2. The second pillar concerns the inherent procedures within the EFSF. For countries in economic distress, the EFSFS’s chief downside was that the granting of financial aid could only be decided by unanimity. As with many current-day institutions that operate with similar ‘veto’ powers, such as the British Houses of Parliament as well, the decision-making procedures are made highly complex, restrictive and frustrating. Beyond this, the inherent forming of the EFSF was under the unspoken understanding that it would not be called upon, at least in the short term. Strauch, its Chief Economist, said the new institution was ‘part of a learning curve and it had to crystal clear that rescue funds would only be used as a last resort. These previously built-in restrictions posed a dilemma on its primary aim of crisis management – it already highlighted the institution’s weaknesses through illustration that any involvement by the EFSF would have costly trade-offs.
3. Lastly, the mere presence of the EFSF, later the ESM, could be argued by considering the already existing European and global institutions that hold the same purpose of crisis management. The so-called Troika consisting of the European Commission, the IMF and the ECB have been incorporated in all the interactions involving the EFSF/ESM. In fact, the Troika launched a €110 billion bailout plan for Greece, grossly exceeding the commitments made by the ESFS and therefore played a far more integral role in managing the Greek Crisis. For this reason, the involvements of the ESFS were played down and less significant as opposed to ineffective. 

On the other hand, however, the roles that the ESM played in other crises, namely Spain’s, as well as a brief on its future commitments go to illustrate the potential that this institution can fulfil. 

Spain’s crisis was a boom-bust cycle turned to a crisis after the Eurozone contagion effect of sovereign spreads. In its second evident recession of 2012, unemployment rates averaged their highest at 26.2%. In this period of downfall, the EFSF was fully prepared to act readily, and pre-funded €30 billion in notes that could have been deployed to Spain if needed. The ESM, later intervening in place of the EFSF, realised it would be most efficient to tackle the fire with a programme limited to banking as doubts were predominantly placed upon Spanish financial markets. Opposed to the previously used example of Greece, this time, the financial adjustment programme was intended predominantly for indirect market capitalisation, meaning the ESM would lend for the sole purpose of restricting the banking sector. In this case, the IMF’s role has been limited since Spain’s initial agreement was signed with the EFSF – the IMF took an advisory role to ‘monitor the economy’. In effect, the rescue programme was a true firewall, giving Spain the time and security to put its economy back on track. 

Furthermore, during the crisis, it is safe to argue that that the ESM graduated into being an established institutions. It gradually became closely aligned to the Troika to ensure its management programmes would succeed. The ESM has proclaimed that its next challenge, after having previously strengthened the Euro area, is now to strengthen the foundations of the Euro. Only two of the ESM’s 6 available tools have been implemented to date, the long term loans in Greece and indirect aid in Spain. Therefore, the potential of the ESM remains at large.

‘If we fail to implement the agenda to deepen the monetary union now, the next crisis will force us to do so. If we do what we know needs to be done, we have the potential to save jobs and economic heartache.’ Klaus Regling(ESM Managing Director)

To conclude, having judged the key reasons that weigh the effectiveness in the involvement of the EFSF/ESM, it is fair to say their involvement in Greece raised concern surrounding the significance of the institution. However, upon researching, the foundation of the institution never adapted itself to manage large-scale crisis. Currently, the structural formation of the 2010 founded ESM is. Therefore, the evidence and debate amalgamates to the fact that the ESM, now essentially incorporated into the Troika, will have more integral involvement in crisis management, and will be efficient when doing so.