13 December 2018

Bruegel: Does the Eurogroup’s reform of the ESM toolkit represent real progress?

The deal reached on eurozone reform at the Eurogroup contains a number of incremental but potentially key technical reforms – in particular regarding the ESM toolkit. Some constitute an improvement, but there are also clear flaws that should be corrected at the Euro Summit.

Overall, despite the fact that the Eurogroup agreement reached on December 4th did not provide the solution to all the missing pieces of the euro architecture in order to make it more resilient (such as a stabilisation function, the full completion of the banking union thanks to the establishment of EDIS, or the improvement of the fiscal rules), the agreement nevertheless made some progress on some technical details.

The deal reached contains a number of improvements: first, making clear that the ESM’s PCCL is conditional on transparent and precise ex-anteeligibility criteria and not on ex-post policy conditions, while replacing the PCCL’s MoU by a ‘Letter of Intent’ should help reduce the strong disincentives to use the ESM, and thus to access to the OMT, in the case of liquidity crises. Second, replacing two-limb CACs by single limb CACs, although not a game changer per se, might facilitate debt restructuring in exceptional insolvency crises.

However, the reform of the ESM toolkit that has been agreed by the finance ministers of the euro area could still be improved at the Euro Summit, where the heads of states and governments will gather at the end of the week. First, the conditions to access the PCCL are particularly tight, which could in the end make the instrument totally useless (more than half of the countries would not be able to use it today). Second, one of the eligibility criteria is based on structural deficit, which is an impractical indicator plagued with measurement issues. Using it as an eligibility criterion is inadequate and this criterion should be dropped. Finally, all of this might be useless if the ECB does not recognise the PCCL has a suitable programme to access the OMT. It is therefore important that the ECB clarifies its position on the access to OMT before the final decision is signed off. [...]

Full analysis on Bruegel

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