Over the past few weeks the Italian public debate has once again stalled on the issue of the European Stability Mechanism (ESM) following the decision of the Eurogroup on April 9th to establish a new emergency line of credit to help Member States support the health expenditures related to Covid-19.
The ESM had already been a protagonist of the debate last November, during the debate on the reform of its regulating Treaty. Already back then doubts were raised on this instrument and on the reform, and I tried to provide some answers with this short guide to the ESM.
This time, the debate focuses on the conditions tied to this new loan. Doubts and questions did not stop even after the Commission and the Council have published documents, which perhaps have not been well understood by some commentators.
To clarify any doubt, I have prepared a Q&A to better understand the details of this agreement on the new ESM line of credit.
Is the money tied to structural reforms, cuts or other particular macroeconomic adjustments?
No. As stated by the Eurogroup agreement, the only condition to have access to the new line of credit – called “Pandemic Crisis Support – will be to spend the resources to cover the direct and indirect health expenses related to Covid-19.
What kind of monitoring will be in place? How can we ensure that the enhanced surveillance typical of other ESM programmes will not be enforced?
EU norms – particularly Art. 2 of the 472/2013 regulation – impose that the Commission place under enhanced surveillance those countries that request financial assistance to EU institutions through ESM. Such surveillance is strengthened and regulated also by art. 3 that requires a series of reporting obligations for the monitored countries and authorises the Commission to access information which it usually does not have access to, as stated in paragraphs 3 and 4. In addition paragraph 5 allows for specific missions to the country under surveillance to carry out necessary analyses.
However, for the new “Pandemic Crisis Support, the EU Commission – in its May 7th 2020 letter – clearly excludes the application of such articles.
More specifically, the Commission explains that the monitoring will reflect the characteristics of this programme (health expenditures) and thus will only be concerned with ensuring that the money is actually being spent for health expenditure. All other information and obligations are clearly excluded, as well as the monitoring missions (except for those normal missions that take place each year in all Member States as part of the so called European Semester).
According to some the European legislation allows to insert conditions after the loan is granted. Is this true?
No. Supporters of this theory mention articles 3(7) and article 7 of the 472/2013 regulation, according to which the Council, acting on the Commission’s proposal, can recommend to the Member State in question the adoption of corrective measures or even to draft a macroeconomic adjustment programme.
But the document of the European Commission that defines the rules of the Pandemic Crisis Support clearly states that these articles are not applicable to the new programme.
So all possibilities to impose additional conditions once the ESM loan is granted are neutralised.
Is it true that there is a post-programme surveillance? Isn't this also a way to reintroduce ex post conditions?
All financial assistance programmes of the EU are subject to “post-programme surveillance” which is nothing more than a monitoring activity on the repayment of the loan. This surveillance is regulated by art. 14 of the abovementioned regulation 472/2013. It is true that paragraph 2 established the application of information obligations typical of enhanced surveillance and that paragraph 4 states that the Commission can, during the monitoring process, request corrective measures to the State. However, also in this case, the Commission has clearly stated that in the Pandemic Crisis Support programme these rules DO NOT APPLY.
Therefore, the post-programme surveillance in this case is nothing more than a monitoring process on the repayment without sanctions nor macroeconomic adjustments requested.
What is the Early Warning System (EWS)? Should we be concerned?
The EWS is the surveillance tool made available to ESM that automatically activates as soon as a country receives financial support from the fund. It is a simple monitoring tool, with which the ESM checks on the short term liquidity situation, the access to markets and the medium to long-term sustainability of the government’s debt.
It is a highly standardised procedure which is carried out as much as possible using public data and which allows ESM to have an “early warning” in case there is a risk of failure to repay the debt by the beneficiary State.
It is important to highlight that no new restrictions are imposed to the beneficiary not even if there is a risk of failed repayment. You can find these information on the FAQs of the EWS available on the ESM website (question 6).
How much could Italy ask for with this new line of credit?
The amount that can be loaned by the ESM within the Pandemic Crisis Support framework amouts to 2% of 2019 GDP. For Italy this amounts to around 36 billion euros.
What rates will the loan have?
The interest rate will be 0,1% per year, to which an upfront commission (paid once) of 0,25% must be added. It is an interest rate lower than the rates usually applied to ESM loans. In comparison, the Italian yearly 10 year Btp today (May 8th 2020) amounts to 1,819%. So 18 times higher.
When must the loan be repaid?
The loan can be issued over a period of 12 months, renewable twice for six months and must be repaid within 10 years.
Is there a deadline to request the funds?
As of today, the loan is available until the end of 2022. This deadline can be adjusted as the situation evolves.
What expenses will be covered?
This line of credit must be used to finance direct and indirect costs for health assistance, care and prevention relating to the expansion of Covid-19. This is the only condition tied to this loan.