The media, political and institutional representatives often mention the ESM in relation to NextGenerationEU and the Recovery Facility: but what is the ESM and why (and how) is it related to NGEU?
One question, one answer
We recently published an in-depth report regarding the so-called Recovery Instrument, or Recovery Instrument, or NextGenerationEU. It is one of the big news of the year and the new programming period! If you haven’t read it yet, do so now!
We left this question unanswered: how does the ESM fit into all this?
Here is a succinct but (hopefully) comprehensive answer. Happy reading
The ESM, a tool “on the side” of European funds
The acronym ESM stands for European Stability Mechanism. As the dedicated page on the Bank of Italy’s website points out, it lies outside the legal framework of the EU, having been established in 2012 through a special intergovernmental treaty between the countries part of the “euro area.” It has its own budget of 80 billion euros (provided by the member countries in proportion to their economic weight) and can raise additional resources through the issuance of bonds guaranteed by the member states.
These funds can be used to fulfill its basic function, which is (as the Bank of Italy points out):
“Granting, under specific conditions, financial assistance to member countries that-while having sustainable public debt-find temporary difficulties in financing themselves on the market.”
The reasons for distrust
The ESM is viewed with distrust by some political figures (not just Italians) for two main reasons.
First, the use of this instrument is conditional on the acceptance of a reform plan to restore balance in public accounts, the measures of which may be unpopular.
It could also raise investors’ concern about the “tightness” of the country’s own accounts; and result in higher interest rates (and/or the so-called “spread”) on securities issued by the recipient country, with a potentially uneconomic end result.
A financial “cousin” of NGEU.
However, despite the differences, the ESM can thus rightly be considered a financial “cousin” of the Recovery Facility:
1) its purposes (support for countries in temporary difficulties),
2) its financing arrangements (through the issuance of securities – by the ESM in one case, by the European Commission on the other),
3) its operation (providing financing to countries in difficulty at favorable rates),
Do indeed have commonalities with NGEU.
In conclusion: focus on NGEU – and we await new developments!
NGEU-i.e., the Recovery Instrument and its Italian declination, the PNRR or National Plan for Recovery and Resilience-remain squarely in the spotlight of our Guide and our readers, given their relevance to Italy and (potentially) to Europlanning activity. Of course, activation of the ESM would bring new funds and (potentially) new projects for our readers to talk about.
Our pages have not yet delved into how the ESM works because, at the moment, Italian institutions have not deemed it necessary to use it. If this happens, we will know how to update you with more details and information.
