While political discussions among G8 leaders have occupied many of the recent headlines, the future of the Eurozone financial system received significant attention at a recent meeting of Eurozone finance ministers in Luxembourg. One of the key topics addressed by the finance ministers was the future of the European Stability Mechanism, or ESM.
Created in September 2012, the ESM is designed to be a long-term mechanism for the Eurozone to provide financial assistance to member nation financial systems in times of significant stress. In the past several years when various debt crises hit many European countries, various short-term funding solutions were implemented. With the eventual expiration of these interim financial solutions, a longer-term facility was created in the form of the ESM.
It is anticipated the ESM will have contributed capital of approximately 80 billion euros. In times of significant draws on ESM funds, the ESM is authorized to enter into the capital markets and raise an additional 620 million euros.
Funding of the contributed capital for the ESM is expected to come from the 17 current members. Contributions to the ESM are based on the relative size of the gross domestic product of each member nation. As might be expected, the largest capital contributor is Germany at 27.1 percent. Next largest capital contributors are France and Italy contributing 20.4 percent and 17.9 percent, respectively.
Smaller nations contributing to the ESM include Malta, Estonia and Cyprus. Each of these member nations is expected to contribute less than 1 percent each of the initial ESM capital.
Bailout funds are available to members of the ESM, following a prescribed application process. Five different support programs are currently available through the ESM, and any one or a combination of the five programs can be provided to the member nation.
One of the outstanding issues regarding the use of ESM funds is whether or not these resources can be used to assist in previous bailout events. Given the significant financial stresses that have occurred in a range of Eurozone countries over the past several years, the decision to use the new ESM to fund prior financial rescue activities will have a significant effect on the quantity of funds available within the ESM for future events.
A series of relatively dispersed governance structures oversaw the past Eurozone financial bailout activities. A functional central support entity, such as that envisioned with the creation of the European Stability Mechanism, will enable the Eurozone to better cope with future financial system challenges and provide a more stable block of trading partners for U.S. industrial companies and banks.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.