European Scrutiny Committee Contents

7 Financial assistance for Member States







COM(10) 383

Council Regulation establishing a European financial stabilisation mechanism

Draft amending budget No. 7 to the general budget 2010: statement of expenditure by section: Section III — Commission

Legal base(a) Article 122(2) TFEU; —; QMV

(b) Article 314 TFEU; co-decision; QMV

Document originated(a) 10 May 2010

(b) 12 July 2010

Deposited in Parliament(a) 25 May 2010

(b) 15 July 2010

DepartmentHM Treasury
Basis of considerationTwo EMs of 15 July 2010 and Minister's letter of 18 July 2010
Previous Committee ReportNone
Discussion in Council(a) 9 May 2010

(b) 26 July 2010

Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B


7.1 At an extraordinary meeting of the ECOFIN Council on 9 May 2010 agreement was reached for a Regulation creating a European Financial Stabilisation Mechanism (EFSM), as part of a comprehensive package of measures to preserve financial stability in the EU. The Regulation was based on Article 122(2) TFEU, which allows EU financial assistance to be granted to a Member State facing "severe difficulties caused by natural disasters or exceptional occurrences beyond its control". It provides for the EU Budget to guarantee EU borrowing to support Member States in need, up to the level of €60 billion (£49.10 billon). Support under the EFSM would be provided in parallel with IMF funding and would be subject to joint EU/IMF conditionality.

7.2 The Financial Regulation governing EU budgetary matters allows the Commission, in exceptional or unforeseen circumstances, to submit Draft Amending Budgets to alter the EU Budget for the current financial year.

The documents

7.3 The Regulation establishing the EFSM, document (a), details the process, terms and conditions for any activation of the mechanism:

  • a Member State seeking activation of the EFSM must discuss with the Commission, in liaison with the European Central Bank, an assessment of its financial needs and submit a draft economic and financial adjustment programme to the Commission and the Economic and Financial Committee;
  • the committee would then agree a mandate for the Commission, in parallel with IMF staff, to negotiate a programme of support with the Member State;
  • the final decision of the provision of financial assistance would be taken by the ECOFIN Council, acting by a qualified majority on a proposal from the Commission;
  • the financial details of the assistance are unequivocal and non-negotiable;
  • the funds underlying the assistance would exist as a loan or credit line and would be raised from the capital markets or financial institutions;
  • all financial transactions would be carried out in euros and be supervised by the European Central Bank;
  • the Member State would have to open a special account with its own central bank to manage the assistance;
  • in order to maintain the Commission's reputation in the markets and maximise the effect of funding, it would raise funds at the most appropriate time in between planned disbursements;
  • any raised funds not currently required would be held in a dedicated cash or securities account and could not be used for any other purpose than for the one already agreed under the loan;
  • interest payments due under the loan would be paid to an account with the European Central Bank;
  • if the Member State requested an improvement on the interest of the loan, the Commission could re-finance all or part of its initial borrowing or restructure the financial conditions;
  • costs incurred by the EU in concluding and carrying out any operation connected to the assistance would be borne by the Member State;
  • once the programme had commenced and the details, such as the size of tranches and timing of their release, were decided, the Member State would provide all necessary information and data to the Commission;
  • the Commission would then decide on the release of further instalments based on this information;
  • the European Court of Auditors and the Commission, including the European Anti-Fraud Office, have the right to carry out any technical or financial controls and audits that they consider necessary; and
  • the case of the Member State would be reviewed every six months, effective from the time that the Regulation was enacted.

7.4 The Commission's Draft Amending Budget (DAB) No. 7 to the 2010 EU Budget, document (b), proposes creation of a new budget line for the guarantee provided by the EU under the EFSM, and a corresponding article on the revenue side of the EU budget.

7.5 To grant financial assistance under the EFSM, the Commission will raise the funding required by borrowing on the capital markets or with financial institutions on behalf of the EU. Should the debtors default, the Commission may draw on its cash resources to service the debt provisionally. Subsequently, the operation may need to be budgeted within the EU Budget and so creation of a new line on expenditure side of the EU Budget is proposed. At the same time, a corresponding new article on the revenue side is also proposed, for the eventuality that reimbursements after an initial default, or any other revenue arising from the exercise of rights in connection with the guarantee, also need to be budgeted.

7.6 The DAB proposes a token entry (a so-called "pour memoire" entry) for commitment and payment appropriations as well as for revenue. If it becomes necessary, the Commission would propose a transfer or amending budget to provision the budget line with the relevant appropriations.

The Government's view

7.7 On the Regulation establishing the EFSM, document (a), the Economic Secretary to the Treasury (Justine Greening) comments that:

  • the facility created is available to all Member States;
  • a similar facility, the Medium Term Balance of Payment facility, already exists for non-euro area Member States and had previously been used to provide EU support to Hungary, Latvia and Romania in parallel with IMF support;
  • the Government believes that financial problems within the euro-area should be primarily resolved by euro-area Member States — however, it is in the interests of all Member States to support a stable and fully functioning euro-area;
  • on 9 May 2010 the ECOFIN Council also agreed up to €440 billion (£359.70 billon) to complement this Regulation through a Special Purpose Vehicle, the European Financial Stabilisation Facility;
  • this is a voluntary intergovernmental agreement of euro-area Member States, lasting three years, which has no bearing on the EU Budget; and
  • the Government has chosen not to participate in the Special Purpose Vehicle, will not make contributions and there is, therefore, no question of any liability arising to the UK.

7.8 On the financial implications of the Regulation the Minister says that:

  • up to €60 billion (£49.10 billon) of emergency finance could be provided;
  • should the mechanism be called upon the Commission would raise the money on capital markets, guaranteed by the EU Budget;
  • loans would be granted in parallel with IMF programmes and would be subject to policy conditionality;
  • only where there were defaults on loan repayments would the EU Budget be called on to meet the cost of that repayment;
  • this would require an increase in the Budget and, in turn, an increase in Member States' contributions to the EU Budget;
  • as an indicative guide, the UK's GNI-share contribution to the 2010 budget is currently estimated at 13.8%; and
  • any increase to the UK's contribution would be within the limits of the ceiling already agreed by Parliament through the European Communities (Finance) Act 2008.

7.9 Finally, the Minister says that the Government regrets that we (and the Lords EU Committee) did not have time to consider this document before it was agreed. However, she comments that "It should be noted that whilst agreement on behalf of the UK was given by the previous administration, cross-party consensus had been gained."

7.10 The Minister says that DAB No. 7/2010, document (b), is necessary to make the EFSM fully operational and, as such, the Government supports its proposals. She adds that the proposals have no immediate financial implications.

7.11 In her letter covering her two Explanatory Memoranda the Minister first reiterates that the EFSM is part of a package of exceptional measures agreed to support vulnerable EU economies, that it was endorsed by decisions of the previous administration, but that the Government judges these decisions to be an appropriate response to the crisis and that it is regrettable that the draft Regulation could not be scrutinised. Secondly the Minister reiterates the description of the DAB's purpose, its technical nature and that it has no immediate resource implications. She then outlines the rushed timetable for considering the proposal, publication on 13 July 2010 and adoption by the Council on 26 July 2010, which was to ensure that there is no undue delay in making the EFSM operational, in the event that a Member State should need to draw upon the funds available at short notice. The Minister continues that it is important that the EFSM is seen to have the full backing of Member States if it is to achieve its purpose and therefore that the UK supports the technical steps proposed in the DAB. She regrets therefore that, in this instance, the Government must override the scrutiny reserve resolution in order to give its support to the measures proposed.


7.12 We are grateful to the Minister for the information she gives us about the Regulation establishing the European Financial Stabilisation Mechanism, document (a), and the rationale for it. As for the scrutiny breaches we note and accept the need for the urgent adoption of both measures, even though proper scrutiny was not possible. However given the possible budgetary liability the UK maybe exposed to we recommend the documents should be debated in European Committee B.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 22 September 2010