Explanatory Memorandum to COM(2017)827 - Establishment of the European Monetary Fund - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2017)827 - Establishment of the European Monetary Fund. |
|---|---|
| source | COM(2017)827  |
| date | 06-12-2017 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
It is almost sixteen years since the first euro coins and notes entered European citizens' daily lives. The currency is now used every day by 340 million Europeans in 19 Member States ("euro area"). The euro is the second most used currency worldwide. Sixty other countries and territories around the world, home to 175 million people, have chosen to use the euro as their currency or to peg their own currency to it.
The financial and economic crisis that hit Europe in 2008, the consequences of which are still felt to this day, did not start in the euro area but it laid bare some of its institutional weaknesses. As an emergency response to the immediate challenges, several instruments were adopted. They provided new financial firewalls, assisted the countries most affected and stepped up policy coordination at EU level. Apart from the European Financial Stabilisation Mechanism ("EFSM") based on Council Regulation (EU) No 407/2010, most of them were established outside of the Union legal framework. Member States provided bilaterally financial assistance to Greece and set up the European Financial Stabilisation Facility ("EFSF"). Still in 2010, the European Council concluded that the EFSF, established as a temporary mechanism only, should be replaced by a permanent institution, the European Stability Mechanism ("ESM"). They strengthened the fiscal and financial rules in order to prevent the crisis from escalating further. Monetary policy action by the European Central Bank has also proved decisive.
After years of low or no growth, determined efforts at all levels have started to pay off. Europe is now experiencing a robust recovery. All Member States are now growing and overall EU growth has stood at around 2% on average for several years in a row. 1 The economic sentiment indicator is at its highest in the EU and euro area since 2000. Unemployment is at its lowest since late 2008. Popular support for the euro is the highest in the euro area since since the introduction of the euro notes and coins in 2002. 2 However, as the current Commission said when taking office, the crisis is not over as long as unemployment remains so high, with 14.3 million people still without a job in the euro area in October 2017.
Important lessons needed to be drawn from the crisis years. The relevant issues were already clearly identified in the Five Presidents' Report of June 2015 3 . Since then, a lot has been done in order to 'deepen' the Economic and Monetary Union ("EMU") by 'doing'. The European Semester of economic policy coordination has been strengthened with clearer guidance for the euro area as a whole and a stronger focus on social aspects. Economic governance has been improved, with the creation of a European Fiscal Board and National Productivity Boards. Technical assistance to Member States was boosted with the creation of the Structural Reform Support Service. Important steps towards completing the Banking Union 4 and Capital Markets Union 5 have been taken, notably by advancing in parallel on risk-reduction and risk-sharing measures in the banking sector. To increase ownership at all levels, the dialogue with national and European political actors and social partners has also been intensified.
As a result, the euro area architecture is much more robust than ever before but this does not mean that it is complete. The Reflection Paper on the deepening of the Economic and Monetary Union, 6 as well as the Reflection Paper on the future of EU finances 7 presented by the Commission as part of the follow-up to the White Paper on the Future of Europe, 8 recalls the state of play and outlines a possible ways forward to 2025.
Europe is now visibly regaining its strength. Both economically and politically, there is a window of opportunity and positive developments are further encouragements to act. There should be no complacency: one should always fix the roof when the sun is shining.
In his State of the Union address on 13 September 2017, 9 President Juncker set out his views for a More United, Stronger and More Democratic Union and made it clear that the completion of Europe's Economic and Monetary Union is an essential part of the roadmap leading to the meeting of Leaders in Sibiu, called by President Tusk for 9 May 2019, where important decisions on the future of Europe should take place.
This is also reflected in the Leaders' Agenda, 10 with EU Leaders planning a Euro Summit on 15 December 2017 to discuss a timeline for decisions on the Economic and Monetary Union and the Banking Union, and a dedicated meeting planned on 28-29 June 2018 with a view of reaching concrete decisions.
The call for unity, efficiency and democratic accountability of the State of the Union address is particularly relevant for the completion of the Economic and Monetary Union:
• Unity: The euro is the single currency of the EU and what is conceived for the euro area should also be conceived for and with those Member States that are expected to join the euro in the future. With the exception of the United Kingdom and Denmark, all non-euro Member States are legally committed to joining the euro eventually. 11 Moreover, with the United Kingdom's departure, euro area economies will represent about 85% of the EU's total Gross Domestic Product. The EU's political and economic integration, of which the single market is the core, means that the futures of both euro and non-euro Member States are already intertwined, and a strong and stable euro area is key to its members as well as to the EU as a whole.
This explains why it is important that the euro area Member States through the European Monetary Fund ("EMF") jointly with the non-euro Member States which participate in the Banking Union provide a backstop for the Single Resolution Board ("SRB") on equivalent terms and conditions to allow the Single Resolution Board to use such means if necessary for undertaking successfully a resolution action in the Banking Union.
• Efficiency: A stronger Economic and Monetary Union requires stronger governance and a more efficient use of available resources. The current system still reflects a patchwork of decisions taken to face an unprecedented crisis. This has sometimes led to a multiplication of instruments and an increased sophistication of rules, which is a source of complexity and creates risks of duplications. Greater synergies, streamlined procedures and integration of intergovernmental arrangements within the EU legal framework would strengthen governance and decision-making. It is also for efficiency reasons that all the changes proposed by the Commission as part of today's package can be implemented within the framework of the current EU Treaties.
Experience has shown that it is difficult and cumbersome to articulate a collective action of the Member States with the competences of economic policy coordination conferred on the Union. More generally, the coexistence of the Union institutions and of a permanent intergovernmental mechanism such as the ESM generates a complex landscape where judicial protection, respect of fundamental rights and democratic accountability are fragmented and unevenly implemented. Furthermore, the decision-making process under an intergovernmental method usually requires cumbersome national procedures and is therefore often difficult to reconcile with the speed needed for ensuring an effective crisis management, as illustrated by the use in July 2015 of the EFSM to bridge finance an ESM support to Greece: amending an EU Regulation and deciding to use it proved in practice to be quicker than taking an ordinary ESM decision of disbursement. This also extends to the adaptation of actions to new circumstances. Since even minor modifications rely on the signature of all contracting parties at the highest political level, the approval of the national Parliaments may be necessary to modify them. Those procedures are time consuming and may prevent taking action at the time when it is needed. The EU legal framework, on the other hand, offers a potential range of methods for modifications of existing acts, with their complexity corresponding to the seriousness of the issue in question and the form of the measure to be adapted. Application of EU decision-making framework would therefore make the process of adjustments of relevant provisions faster, if needed. Greater synergies and a more streamlined decision-making would strengthen governance and procedures.
• Democratic accountability: Completing the Economic and Monetary Union also means greater political responsibility and transparency about who decides what and when at the different levels. This requires bringing the European dimension of decision-making closer to citizens and more to the forefront of national debates and making sure that both national Parliaments and the European Parliament have sufficient powers of oversight on the management of the EU’s economic governance. This should also lead to greater ownership of collective decisions and openness on the way they are taken and communicated. This is in particular true for the EMF as successor to the ESM. Democratic accountability is a key aspect of the debate on the future of Europe. The ESM has acquired over the years a very important role. Its transformation into a EMF should be accompanied with an effort to anchor its functioning in the robust accountability framework of the Union together with a fully-fledged judicial control. The involvement of the European Parliament in particular would enhance democratic oversight, while the role for National Parliaments remains fully preserved, in view of the large contributions of the Member States to the EMF.
For all the abovementioned reasons, the necessary structures for providing financial stability support to euro area Member States are best placed in the Union framework and in the hands of a Union body created for such purpose. Given the financial constraints and challenges faced by the Union itself and the accumulated expertise in this area by the ESM, however, setting up such a body from scratch would be prohibitively cost-inefficient. Hence, the proposed EMF should rather incorporate and absorb the already existing ESM with its current objectives, functions and instruments. The EMF now proposed by the Commission can be implemented within the framework of the current Treaties. Beyond such endeavour, this also offers the ideal occasion for creating a common backstop to the SRB. The creation of a backstop for the Single Resolution Fund ("SRF") was already agreed by Member States in 2013, as a complement to the political agreement on the Single Resolution Mechanism Regulation. 12 A common last-resort backstop would serve the purpose of providing enhanced confidence to all parties concerned with regard to the credibility of the actions to be taken by the SRB and to increase the financial capacity of the Single Resolution Fund. As a last resort tool, it would only be activated in case the Single Resolution Fund proved to be insufficient to finance the resolution of the bank or banks concerned. The backstop would be fiscally neutral over time, since any funds used would be recovered from the banking sectors in the Member States participating in the Banking Union.
Safeguarding the financial stability of euro area Member States is the rationale linking the SRB with the EMF and its predecessor, the ESM, created in order to safeguard the financial stability of the euro area. In fact, the now well-established sovereign-bank nexus implies that not only the financial soundness of sovereigns but also the one of systemic banks are a critical element for the financial stability of the euro area and the single currency itself. It is hence all the more natural that this proposal will provide the link between the activities of the SRB and of the EMF in the form of an instrument allowing for providing either a credit line or guarantees to the SRB in support of its activities.
In recent years, many views have been expressed on the completion of the Economic and Monetary Union. Opinions may differ but there is a broad consensus on the need to make further progress. There have also been very significant contributions from the European Parliament 13 and important discussions in the Eurogroup. 14
The proposed Regulation on the establishment of the EMF is one of the initiatives announced in the Commission's Communication on 'Further steps towards completing the economic and monetary union'. This Communication gives a summary of the rationale and content of all the initiatives presented by the Commission. It then recalls how this package is embedded in a broad roadmap to complete the Economic and Monetary Union by 2025 and provides a timeline for action over the next 18 months.
This proposal builds on the well-established structure of the European Stability Mechanism by creating a European Monetary Fund anchored within the EU's legal framework. This was already announced in the Five Presidents' Report and has also been called for by the European Parliament which stressed the need for the European Monetary Fund to be equipped with adequate lending and borrowing capacities and a clearly defined mandate. 15
The European Stability Mechanism was set up in October 2012 at the height of the crisis. The pressure of events at the time led to an intergovernmental solution being found. However, it was already clear then that this could also be achieved within the framework of the EU Treaties, as indicated, for instance, in the Commission's Blueprint for a Deep and Genuine Economic and Monetary Union. 16
Over the years, the European Stability Mechanism has proven decisive in helping to preserve the financial stability of the euro area. It has done so by providing additional financial support to euro area Member States in distress. Its transformation into a European Monetary Fund will further strengthen its institutional anchoring. It will help to create new synergies within the EU framework, notably in terms of transparency, judicial review and efficiency of the EU’s financial resources and thus offering a better support to Member States. It will also help improve further the cooperation with the Commission and accountability to the European Parliament. This will be done without affecting the way in which national governments are held to account by their own national Parliaments and preserving the commitments of the existing European Stability Mechanism.
The initiative takes the form of a proposal for a Council Regulation, which is subject to the consent of the European Parliament, under Article 352 of the Treaty on the Functioning of the European Union. Article 352 allows for the integration of the European Stability Mechanism into the Union framework, as this action is necessary for the financial stability of the euro area 17 and the Treaties have not provided any other legal basis for the EU to reach this precise objective. 18 Paragraph 2 of that Article explicitly foresees a role for national Parliaments. Historically, several significant decisions paving the way towards the establishment of the Economic and Monetary Union have been based on the equivalent of Article 352. For instance, decisions on the European Monetary Cooperation Fund, the European Currency Unit and the first balance of payment mechanisms were taken under Article 235 of the Treaty on the European Economic Community, the predecessor to Article 352.
The proposal is complemented by a draft of what could become an intergovernmental agreement for euro area Member States to agree among themselves on the transfer of funds from the European Stability Mechanism to the European Monetary Fund. This also foresees that the Fund would succeed to and replace the ESM, including in its legal position, with all its rights and obligations.
Under today's proposal, the European Monetary Fund will be established as a unique legal entity under Union law. It will succeed the European Stability Mechanism, with its current financial and institutional structures essentially preserved. This means that the European Monetary Fund will continue to provide financial stability support to Member States in need, to raise funds by issuing capital market instruments and to engage in money market transactions. The membership will not change and the participation of additional Member States will remain possible, once they adopt the euro.
Given that the European Monetary Fund would become a Union body, some targeted adjustments are necessary to the current structure of the European Stability Mechanism. They include an endorsement by the Council of discretionary decisions taken by the European Monetary Fund. 19
In addition, today’s proposal adds a limited number of new features.
First, the European Monetary Fund will be able to provide the common backstop to the Single Resolution Fund. This is an essential component of the second pillar of the Banking Union, the so-called Single Resolution Mechanism. 20 When the Single Resolution Mechanism was adopted in 2013, Member States also agreed to develop a backstop to the Single Resolution Fund. This was meant as a last resort to be activated if the Single Resolution Fund's immediately available resources proved to be insufficient for capital or liquidity purposes. Member States also agreed that it should be fiscally neutral over the medium term so that any potential deployment of the backstop would be recovered from the banking sector in the euro area.
New EU rules on banking supervision and resolution developed in the aftermath of the crisis have significantly reduced the likelihood and potential impact of bank failures. However, a common fiscal backstop continues to be needed to enhance the financial capacity of the Single Resolution Fund. Such a backstop will instil confidence in the banking system by underpinning the credibility of actions taken by the Single Resolution Board. In turn, this would actually reduce the likelihood of a situation in which a backstop would be to be called on.
There is now wide consensus that the European Stability Mechanism – the future European Monetary Fund – is best placed to provide such a backstop in the form of a credit line or guarantees to the Single Resolution Fund. This is reflected in today's proposal which also sets out appropriate decision-making processes to ensure that the backstop can be deployed quickly, if needed. Special arrangements are also proposed to cater for the legitimate interests of non-euro Member States having joined the Banking Union.
Second, in terms of governance, the proposal includes the possibility for faster decision-making in specific urgent situations. It is proposed to keep unanimity voting for all major decisions with financial impact (e.g. capital calls). However, reinforced qualified majority, in which 85% of the votes are required, is proposed for specific decisions on stability support, disbursements and the deployment of the backstop.
Third, as regards the management of financial assistance programmes, the proposal foresees a more direct involvement of the EMF, alongside the European Commission.
Fourth, the proposal refers to the possibility for the European Monetary Fund to develop new financial instruments. Over time, such instruments could supplement or support other EU financial instruments and programmes. Such synergies could prove particularly useful if the European Monetary Fund were to play a role in support to a possible stabilisation function in the future.
With these changes, the European Monetary Fund will establish itself as a robust crisis management body within the Union framework, working in full synergy with other EU Institutions. The Council and the Commission will retain their competences and responsibilities in terms of economic and fiscal surveillance and policy coordination, as set out in the EU Treaties.
Practical cooperation can also be stepped up to better serve Member States, engage with market participants and avoid duplications of activities. Further cooperation could be sought in the light of further progress towards the strengthening of Economic and Monetary Union.
• Proposed improvements of the ESM set-up
The proposed Regulation and its Annex containing the Statute of the EMF is based on the ESM Treaty and the ESM By-laws.
In particular the Annex largely mirrors the text of the ESM Treaty. It leaves a number of articles of the ESM Treaty broadly unchanged. It concerns articles related to the capital stock, capital calls as well as the contribution key (Articles 8, 9 and 11), the articles related to the instruments for providing financial stability support to EMF Members (Articles 14 to 18), the pricing policy (Article 20), the borrowing operations (Article 21), the financial management (Articles 25 to 28), the internal audit (Article 33), and the temporary correction of the contribution key (Article 44).
The proposal departs from the text of the current ESM Treaty for two reasons, legal consistency with the EU legal framework and limited changes with a view to enhance the operations and decision-making of the EMF.
First, the proposed Regulation itself includes articles with changes which are necessary for reasons of consistency with EU law: the establishment of the EMF (Article 1), its legal succession to and replacement of the EMF (Article 2), the introduction of an approval process by the Council for decisions taken by the Board of Governors or Board of Directors which exhibit political discretion (Article 3) and the related publication requirements (Article 4), and dedicated accountability provisions (Articles 5 and 6) towards the European Parliament and national Parliaments. Two final provision are also foreseen (Articles 7 and 8).
Second, the Annex to the proposed Regulation contains the Statute of the EMF. It contains changes in order to ensure consistency with Union law such as: the determination of the lending capacity (Article 8), the principles for stability operations (Article 12), inclusion of the instrument for providing assistance for the direct recapitalisation of credit institutions (Article 19), the procedure related to the EMF budget (Articles 29-30), the annual accounts (Article 31), the financial statements and the annual reports (Article 32), the external audit (Article 34), the Board of Auditors (Article 35), the seat agreement (Article 37), the privileges and immunities (Article 38), the staff provisions (Article 39), professional secrecy and exchange of information (Article 40), the management empowerment related to the EFSF (Article 42), anti-fraud measures (Article 45), access to documents (Article 46), language requirements (Article 47).
Moreover, changes are introduced to articles of the ESM Treaty for achieving certain additional objectives: enhancing the voting procedures (Articles 5 and 6), the appointment procedure for the managing director (Article 7), establishment of the new function to support the SRB and amending the EMF objectives and principles accordingly (Articles 3, 22 to 24), providing more flexibility with regard to cooperation arrangements (Article 41).
Contents
- 3) Table of equivalence
- The call for unity, efficiency and democratic accountability of the State of the Union address is particularly relevant for the completion of the Economic and Monetary Union:
- 1) Legal consistency with the EU legal framework:
- 2) Enhancement of the operations and decision-making of the EMF:
- The following correlation table provides an overview of the compared structure of the ESM Treaty on the left side and of the proposed Regulation and the Statute of the EMF on the right side:
The following correlation table provides an overview of the compared structure of the ESM Treaty on the left side and of the proposed Regulation and the Statute of the EMF on the right side:
| Articles of the ESM Treaty | Corresponding provisions of the proposed EMF Regulation and the Statute of the EMF ("Statute") |
| Article 1 (establishment of the EMF) | Article 1 of the proposed Regulation (establishment of the EMF) |
| - | Article 2 of the proposed Regulation (succession to and replacement of the ESM) |
| - | Article 3 of the proposed Regulation (role of the Council) |
| - | Article 4 of the proposed Regulation (publication) |
| - | Article 5 of the proposed Regulation (European Parliament) |
| - | Article 6 of the proposed Regulation (national Parliaments) |
| - | Article 7 of the proposed Regulation (references to ESM in existing Union legislation) |
| - | Article 1 of the Statute (legal status of the EMF) |
| Article 2 (membership) | Article 2 of the Statute (membership) |
| Article 3 (purpose) | Article 3 of the Statute (objective and tasks) |
| Article 4 (structure and voting rules) | Article 4 of the Statute (structure and voting rules) |
| Article 5 (board of governors) | Article 5 of the Statute (board of governors) |
| Article 6 (board of directors) | Article 6 of the Statute (board of directors) |
| Article 7 (managing director) | Article 7 of the Statute (managing director) |
| Article 8 (authorised capital stock) | Article 8 of the Statute (initial authorised capital stock) |
| Article 9 (capital calls) | Article 9 of the Statute (capital calls) |
| Article 10 (changes in authorised capital stock) | Article 10 of the Statute (capital increases) |
| Article 11 (contribution key) | Article 11 of the Statute (contribution key) |
| Article 12 (principles) | Article 12 of the Statute (principles underlying stability operations of the EMF) |
| Article 13 (procedure for granting stability support) | Article 13 of the Statute (procedure for granting stability support to EMF Members) |
| Article 14 (ESM precautionary financial assistance) | Article 14 of the Statute (EMF precautionary financial assistance) |
| Article 15 ((financial assistance for the re-capitalisation of credit institutions of an ESM Member) | Article 15 of the Statute (financial assistance for the re-capitalisation of credit institutions of an EMF Member) |
| Article 16 (ESM loans) | Article 16 of the Statute (EMF loans) |
| Article 17 (primary market support facility) | Article 17 of the Statute (primary market support facility) |
| Article 18 (secondary market support facility | Article 18 of the Statute (secondary market support facility) |
| Article 19 (review of the list of financial instruments) | - |
| - | Article 19 of the Statute (instrument for the direct recapitalisation of credit institutions) |
| Article 20 (pricing policy) | Article 20 of the Statute (pricing policy) |
| Article 21 (borrowing operations) | Article 21 of the Statute (borrowing operations) |
| - | Article 22 of the Statute (credit line or guarantees to the SRB) |
| - | Article 23 of the Statute (rules applying to the EMF) |
| - | Article 24 of the Statute (rules applying to the participating Member States whose currency is not the euro, within the meaning of Article 2 of Regulation (EU) No 1024/2013) |
| Article 22 (investment policy) | Article 25 of the Statute (investment policy) |
| Article 23 (dividend policy) | Article 26 of the Statute (dividend policy) |
| Article 24 (reserve and other funds) | Article 27 of the Statute (reserve and other funds) |
| Article 25 (coverage of losses) | Article 28 of the Statute (coverage of losses) |
| Article 26 (budget) | Article 29 of the Statute (budget) |
| - | Article 30 of the Statute (establishment of the budget) |
| Article 27 (annual accounts) | Article 31 of the Statute (annual accounts) |
| - | Article 32 of the Statute (financial statements and annual report) |
| Article 28 (internal audit) | Article 33 of the Statute (internal audit) |
| Article 29 (external audit) | Article 34 of the Statute (external audit) |
| Article 30 (board of auditors) | Article 35 of the Statute (board of auditors) |
| Article 31 (location) | Article 36 of the Statute (location) |
| - | Article 37 of the Statute (seat agreement) |
| Article 32 (privileges and immunities) | Article 38 of the Statute (privileges and immunities) |
| Article 33 (staff of ESM) | Article 39 of the Statute (staff of the EMF) |
| Article 34 (professional secrecy) | Article 40 of the Statute (professional secrecy and exchange of information |
| Article 35 (immunities for persons) | - |
| Article 36 (exemption from taxation) | - |
| Article 37 (interpretation and dispute settlement) | - |
| Article 38 (international cooperation) | Article 41 of the Statute (cooperation) |
| Article 39 (relation with EFSF lending) | - |
| Article 40 (transfer of EFSF supports) | - |
| - | Article 42 of the Statute (management of the EFSF) |
| Article 41 (payment of the initial capital) | Article 43 of the Statute (payment of initial capital) |
| Article 42 (temporary correction of the contribution key) | Article 44 of the Statute (temporary correction of the contribution key) |
| Article 43 (first appointments) | - |
| Article 44 (accession) | - |
| Article 45 (annexes) | - |
| Article 46 (deposit) | - |
| Article 47 (ratification, approval or acceptance) | - |
| Article 48 (entry into force) | Article 8 of the proposed Regulation |
| - | Article 45 of the Statute (anti-fraud measures) |
| - | Article 46 of the Statute (access to documents) |
| - | Article 47 of the Statute (language requirements) |
• Consistency with existing policy provisions in the policy area
With its proposal to establish the EMF, the Union would provide itself with a Union body to act decisively in order to safeguard the financial stability of its Member States. More specifically, in combination with the permanent facility for providing medium-term balance of payment support for non euro Member States, the Union would be equipped with a full range of permanent stabilisation facilities covering the entirety of the Member States, and drawing on considerable financial resources, over and beyond those accessible through the EFSM.
The proposed Regulation on the establishment of the EMF is also a logical step in addition to Regulation (EU) No 472/2013. In the latter Regulation the Union asserted its competence in the area of financial assistance and the economic policy coordination related thereto, while showing also its capacity to provide for appropriate arrangements, combining the democratic legitimacy of its framework with the efficiency of its decision-making structures. The establishment of the EMF within the Union framework is hence fully in line with the Union's past policy initiatives and complements previous action in that respect.
Furthermore, the creation of a backstop function in order to support the SRB complements recent initiatives to decisively weaken the link between Member States finances and their banking systems. By conferring to the SRB the design and execution of schemes to resolve credit institutions, Regulation (EU) No 806/2014 in addition to Directive 2014/59/EU was a major step into this direction. The Regulation empowers the SRB to contract financial arrangements to put into place funding arrangements. The proposal implements this while clarifying that any funds the SRB borrows from the EMF should be recouped fully from the banking system.
Also future policy initiatives such as for instance the establishment of a stabilisation function could be conceived in this context. A stabilisation function is defined by the possibility to rapidly activate resources in an automatic way, subject to eligibility criteria defined in advance. The objective would be to use these resources to attenuate the effects of large asymmetric shocks. In case of a downturn, Member States would first use their automatic stabilisers and discretionary fiscal policy in compliance with the Stability and Growth Pact (SGP). The SGP provides for additional buffers and the necessity for a smaller fiscal effort to be undertaken during difficult economic conditions. Only if these buffers and stabilisers are not sufficient in the case of large asymmetric shocks, the stabilisation function would be triggered. The EMF could support the implementation of such a function by means of organising and making available any necessary market financing associated with the triggering of the function.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for this proposal is Article 352 TFEU. To use that Article, three conditions must be fulfilled. The first two conditions are that no specific legal basis exists in the Treaties and that the action is within the framework of Union policies. The European Court of Justice has already ruled that both conditions are met as regards the ESM (in the Pringle case 21 ). Within the framework of the economic policy of the Union, as provided for in Title VIII 'Economic and Monetary Policy' of Part III of the TFEU, the necessary powers for the Union to establish a Union body in charge of providing financial support for ensuring the financial stability of the euro area have not been enshrined. In the absence of any such powers, Article 352 TFEU allows the Council to adopt unanimously on a proposal from the Commission and after obtaining the consent of the Parliament, the appropriate measures. The third condition is the necessity to attain a Treaty objective. The necessity of having a body like the ESM to safeguard the financial stability of the euro area is based on factual elements and confirmed by Article 136 i TFEU and the second recital of the ESM Treaty which refer to the current ESM as 'a stability mechanism to be activated if indispensable to safeguard the financial stability of the euro area as a whole'. The establishment of the EMF is necessary to contribute to the safeguarding of the financial stability of the euro area as a whole, its Member States and the non euro Member States which participate in the Banking Union on the basis of a close cooperation agreement with the ECB in accordance with Council Regulation (EU) No 1024/2013.
The integration of the ESM into the Union framework through a Regulation based on Article 352 TFEU would ensure a seamless continuation of activities and a direct legal succession between the existing ESM and the new Union body (the EMF). The euro area Member States would agree that the capital of the ESM is attached to this body, through a simplified multilateral act.
Article 352 TFEU could also be used to confer additional tasks on the ESM when it is integrated into the Union.
Although a measure based on Article 352 TFEU is adopted by unanimity in the Council (EU28), the application of such a measure can be limited to a subset of Member States where the limitation rests on an objective reason. The fact that the ESM acts only to safeguard the financial stability of the euro area justifies that its membership is limited to euro area Member States. As a result, the proposed EMF could operate as the ESM currently does, with its support available only to euro area Member States and its internal governance structure made up of those same Member States.•Subsidiarity (for non-exclusive competence)
The financial stability of the economic and monetary union and the Member States which participate in the Banking Union has a Union wide dimension. Given the strong interconnections between euro area Member States, severe risks to the financial stability of Member States may put at risk the financial stability of other Member States and of the euro area as a whole.
The proposed Regulation sets out the framework for providing financial stability support to Member States whose currency is the euro and also foresees a new role which consists of providing the financial means to the SRB. Regarding the latter role, the EMF will be entitled to provide credit lines and guarantees to the SRB which could serve as a backstop for the Single Resolution Fund.
Member States and national authorities cannot unilaterally solve risks to financial stability posed to Member States by financial markets which operate on a cross-border basis beyond the scope of national jurisdictions. In addition, Member States have difficulties in mitigating on their own risks. Member States and national authorities cannot address on their own the systemic risks that another Member State or its credit institutions can pose to the financial stability of the Union as a whole.
The objectives of this Regulation cannot be sufficiently achieved by the Member States individually and can therefore, by reason of the scale of the action, be better achieved at Union level in accordance with the principle of subsidiarity as set out in Article 5 i TFEU.
• Proportionality
The proposal aims to ensure the financial stability in the euro area and the EU as a whole, its Member States, and those Member States which participate in the Banking Union. The proposal sets out a streamlined framework for the provision of financial stability support to EMF Members and the provision of credit lines and guarantees in support of the SRB with respect to financing potential resolution actions undertaken in the Member States which participate in the Banking Union.
The proposal sets out the different roles and responsibilities for all the governance bodies of the EMF and other Union institutions involved. It also provides for the financial instruments at the disposal of the EMF to achieve its objectives.
By establishing a central authority within the Union in charge of providing financial assistance to Member States, the proposal contributes to addressing the risks to financial stability for the euro area and its Member States while preserving the fiscal responsibilities of the Member States by requiring the beneficiary EMF Member to comply with strict policy conditions, appropriate to the financial assistance instrument chosen and the weaknesses to be addressed. Moreover, the EMF would also be tasked with providing financial support to the SRB. The EMF's involvement will contribute to breaking the negative feedback loops between sovereigns, banks and the real economy, which is crucial for a smooth functioning of the EMU.
At the same time, the proposal does not go beyond what is necessary to achieve the EMF's objective of reducing risks to financial stability for the euro area and its Member States. Any support provided by the EMF to EMF Members is subject to policy conditions aimed at addressing the weaknesses present in such Member with a view to rapidly re-establish a sound and sustainable economic and financial situation and restoring or enhancing the Member's capacity to finance itself fully on the financial markets.
• Choice of the instrument
This act takes the form of a Regulation because the act creates a new body within the Union framework contributing to safeguarding the financial stability and has to be binding in its entirety and directly applicable in Member States.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Fundamental rights
The EU is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal could have a direct impact on these rights, as listed in the Charter of Fundamental Rights of the European Union ("The Charter") which is an integral part of the EU Treaties, and the European Convention on Human Rights ("ECHR").
This Regulation respects the fundamental rights and observes the rights, freedoms and principles recognised in particular by the Charter, and, in particular, the right to negotiate conclude and enforce collective agreements or take collective actions, the protection of personal data, the right of access to documents, and should be implemented in accordance with those rights and principles. By integrating the current ESM within the Union framework, it expands the scope of application of the Charter accordingly.
4. BUDGETARY IMPLICATIONS
The proposal is not expected to have any budgetary implications. The EMF's capital will be subscribed by the euro area Member States. The Union budget will not be liable for any expenses or losses of the EMF. The EMF will also have a self-financed budget.
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
Part I of the proposed Regulation (Articles 1 and 2) provides for the establishment of the EMF within the Union framework. Furthermore, this part also provides for a provision catering for issues related to the succession of the EMF to the ESM. The euro area Member States would need to agree that the capital of the ESM is attached to this body, through individual pledges or a simplified multilateral act. As further developed in the Statute, the authorised capital of the EMF would remain unchanged in comparison to the capital of the ESM.
Part II of the proposed Regulation (Articles 3 to 6) contains for legal reasons and with a view to respect the Meroni case-law of the Court of Justice of the European Union, a role for the Council. The latter should approve discretionary decisions taken by the Board of Governors and the Board of Directors. It also provides for the accountability arrangements of the EMF towards the European Parliament, the Council and the Commission. Such arrangements currently do not exist for the ESM in the ESM Treaty. The EMF should be required to submit an annual report to the aforementioned Union institutions together with is annual accounts and its financial statements. The Managing Director can be invited by the Parliament or request to be invited. The EMF should also respond to oral and written questions from the Parliament. The possibility for organising confidential oral discussions just like it is the case for the SRB and the SSM should be provided for in view of the sensitive and confidential nature of the discussions relating the performance of the EMF's tasks. Moreover, the Regulation also provides for a more explicit scrutiny role of national Parliaments in comparison to the current state of play in the ESM Treaty. Such a role is warranted in view of the impact of the EMF's decisions on the political constituencies of its Members.
Part III of the proposed Regulation (Article 7 and 8) caters for references to the ESM in Union legislation as well as the entry into force of the proposed Regulation.
Part I of the Statute of the EMF annexed to this proposed Regulation (Articles 1 to 3) refers to the legal status of the EMF. The EMF shall be a Union body with legal personality. Furthermore, reference is made to the EMF's membership (Article 2). The latter shall consist of euro area Member States. This reflects the current membership of the ESM. Moroever, a provision is foreseen regarding the objectives and tasks of the EMF. In the same way as in the ESM architecture, the EMF would provide financial stability support to its members (euro area Member States). In addition to the ESM's current sole mission, the EMF would also be given the new task of providing credit lines or guarantees in support of the SRB for backstopping the SRF. The latter could serve as a public financial arrangement (backstop) within the meaning of Article 74 of Regulation No 806/2014.
Part II of the Statute of the EMF annexed to this proposed Regulation (Articles 4 to 7) concerns the organisation and decision-making proceedings, including the applicable voting rules of the EMF. Similar to the ESM, the EMF will have a Board of Governors, a Board of Directors, and a Managing Director who would be assisted by a management board. The categories of voting rules enshrined in the ESM Treaty will remain the same in the EMF. Four types of voting rules should be distinguished: (i) unanimity; (ii) reinforced qualified majority (85%), (iii) qualified majority (80%), and (iv) a simple majority. Similar to the rules of the ESM Treaty, unanimity has been kept for decisions having a major direct financial impact on Member States (e.g. decisions on the lending capacity, on capital calls not urgently needed). However, decisions related to granting financial support or disbursements to EMF Members were moved from mutual agreement to a reinforced qualified majority (85%). Moreover, in contrast to the current appointment process of the Managing Director, a consultative role has been foreseen for the European Parliament. Further clarifications stemming from the ESM By-laws on the Managing Director's role and the management board of the ESM have been introduced. Finally, Part II also provides for the rules on the remuneration of members and alternates of the Board of Governors and Board of Directors.
Part III of the Statute of the EMF annexed to the proposed Regulation (Articles 8 to 11) concerns the the authorised capital stock of the EMF and the lending capacity. The lending capacity and the authorised capital stock of the EMF should be fully preserved compared to the current situation in the ESM. The existing possibility to amend the capital stock and lending capacity of the EMF is maintained.
Part IV of the Statute of the EMF annexed to this proposed Regulation (Articles 12 to 21) provides for the principles underlying the stability support operations of the EMF, the procedure for granting financial stability support to EMF Members and the related financial instruments at the disposal of the EMF. These principles and procedures are the same as those provided for in the ESM Treaty with the exception that the EMF will be given a role in negotiating and signing the memorandum of understanding which accompanies the financial stability support operation. An explicit reference to Article 152 TFEU and the Charter of Fundamental Rights is also enshrined confirming that the Regulation in the context of providing financial stability support to EMF Members does not impinge on the right of collective bargaining and collective action. In addition to the instruments already provided for in the ESM Treaty with respect to the provision of financial stability support to euro area Member States, also integrates the instrument for the direct recapitalisation of credit institutions. This instrument was only created after the entry into force of the ESM Treaty on the basis of the enabling clause provide for in its Article 19.
Part V (Articles 22 to 24) of the Statute annexed to this proposed Regulation concerns the provision of a backstop by the EMF and non euro Member States which participate in the Banking Union. The provision of credit lines and guarantees to the SRB would be a totally new function for the EMF in comparison to the ESM's current objective and tasks. The combined amount of outstanding commitments for backstopping the SRF is subject to a ceiling of EUR 60 000 million. This ceiling can be increased. The Board of Governors in agreement with the non-euro Member States of the Banking Union should adopt the financial terms and conditions of such support to the SRB. To ensure a swift availability, the Managing Director shall be authorised to decide on the drawdown of the credit line or the provision of guarantees on liabilities of the SRB. In case the support is requested in relation to a resolution scheme, the SRB may ask such support before the adoption of the resolution scheme.
Part VI (Articles 25 to 28) of the Statute of the EMF annexed to this proposed Regulation deals with the financial management of the EMF. These provisions mirror those of the ESM Treaty.
Part VII (Articles 29 to 35) of the Statute of the EMF annexed to this proposed Regulation concerns the financial provisions of the EMF. Such rules reflect those of the ESM Treaty and the ESM By-laws. These rules concern the budget of the EMF and its establishment, the annual accounts, the financial statements and the annual report, the internal and external audit function and the role of the Board of Auditors.
Part VIII (Articles 36 to 41) of the Statute of the EMF annexed to this proposed Regulation provides for a number of provisions regarding the location of the EMF and its possibility to arrange for a seat agreement.Moreover, the EMF shall benefit from the privileges and immunities established in Protocol No 7. The current regime of privileges and immunities provided for in the ESM Treaty cannot be maintained for legal reasons. Part VIII also caters for the staff rules applicable to the EMF's staff. Rules regarding the confidentiality and exchange of information should be included. Such rules which differ in nature can also be found back in the By-laws of the ESM.
Part IX (Articles 42 to 44) of the Statute of the EMF annexed to this proposed Regulation provides for the transitional arrangements regarding the payment of new EMF members of their contribution to the authorised capital stock. The provision reflects the one provided for ESM Members in the ESM Treaty with the understanding that the article in this Regulation only applies to new EMF Members which would join once they adopt the euro in the future. The rule on the temporary correction of the capital key provided for in the ESM Treaty will also remain intact in the context of the EMF.
Part X (Articles 45 to 47) of the Statute of the EMF annexed to this proposed Regulation contains a number of provisions regarding transparency. Rules regarding anti-fraud measures, access to documents and language requirements are provided for.