The European Stability Mechanism has proposed the creation of a Eurozone Stability Fund totaling up to € 250 billion, which could provide low-interest loans to member states facing external shock problems.
The proposal is presented in a study by ESM executives Florian Misch and Martin Rey, entitled: “The argument for a Eurozone Stability Fund based on lending”, while the CEO of ESM had in recent years been in favor of creation of such a Fund.
ESM executives say there are several factors pushing for the establishment of a Stabilization Budget Fund for the Eurozone.
First, record debt levels and high monetary support policies over the past decade have limited both the monetary area in the Eurozone as a whole and the fiscal space in many member countries.
Second, the prospect of large external and asymmetric shocks is increasing. The war in Ukraine and climate change can directly or indirectly cause significant shocks in the Eurozone. It is mentioned, as an example, that the fires in Greece in 2021 caused expenditures of about 0.3% of GDP in the same year as well as additional expenditures with the 2022 budget.
Third, the depth of the recessions may increase in the future, although the data so far remain limited. However, it is noted that the global financial crisis and the coronavirus pandemic led to economic downturns that had not occurred in developed economies since the end of World War II.
According to the proposal, lending could reach up to 4% of the GDP of countries facing problems due to external shocks, such as the war in Ukraine. To be eligible a country must not be subject to the process of excessive deficit or excessive imbalances.
The duration of the loans will be up to 10 years and their cost will be determined by the interest rate on the 10-year bonds issued by the ESM plus a small margin of 0.1%.
The study also notes that in the Eurozone there is momentum in the discussions on the creation of a stabilization fund, which can be combined with the ongoing debate on the reform of the EU financial framework.
Source: Capital
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