Euro Area Overhauls Bailout Fund Amid Economic Warning Signs

Euro-area finance ministers struck a deal on a long-planned overhaul of the region’s bailout fund, moving a step closer to shoring up the euro’s architecture as the region deals with a devastating pandemic-induced recession.

The agreement, which was signed off at a virtual meeting on Monday, caps a multi-year effort to beef up the European Stability Mechanism, which can provide 500 billion euros ($598 billion) in emergency loans to euro-area economies.

The accord foresees greater powers for the rescue fund in the design and implementation of future bailouts and reinforces its precautionary credit. The ministers also agreed on the early introduction of the ESM as a backstop to the Single Resolution Fund, the euro area’s pot of money for winding down failing banks. This will now be in place as of 2022, two years earlier than planned.

“The ESM reform strengthens the euro and the entire European banking sector,” German Finance Minister Olaf Scholz said in a statement after the meeting. “We are making the euro zone even more robust against attacks by speculators.”

Risk Reduction

While originally considered one of the least contentious aspects of completing the euro’s institutional framework, the ESM overhaul faced setbacks. The main delay had to do with Italy, whose support came into question when the proposal became a hot-button topic in Rome, driving a wedge between partners in the coalition government.

Italian resistance was focused on a clause in the reform plans that would require all euro-area member states to issue bonds with so-called collective action clauses that critics argue would simplify debt-restructuring requests.

More recently, the agreement on the early introduction of the SRF backstop hinged on hawkish nations like the Netherlands and Finland agreeing that banks had sufficiently reduced risks on their balance sheets.

“This is a crucial stepping stone on our path to strengthen the banking union and an important complement to support the recovery,” Paschal Donohoe, who chairs the meetings of finance ministers, told reporters after the meeting.

Getting the deal over the line is a signal that the euro area can proceed with work on building greater safety nets for its members’ economies and financial systems. But the arduous process also highlights how difficult it may be for the bloc to make headway with other key areas that remain deadlocked.

Chief among them: the creation of a common EU deposit insurance that would stabilize the financial system by reducing the risk of bank runs. Such plans have stalled for years amid differences between countries over the need for risk sharing.

©2020 Bloomberg L.P.

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