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Reforming the European Stability Mechanism

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  • Christian Bauer
  • Bernhard Herz

Abstract

The European stability mechanism (ESM) is a permanent crisis resolution mechanism for euro area countries. We analysed the costs of the current ESM refinancing design and evaluated an alternative asset‐backed securities (ABS) structure under different scenarios. Our simulation results indicate that switching to an ABS structure could substantially lower the ESM refinancing rate by up to 3.5 per cent. Moreover, the current structure severely limits the ESM's potential to stabilize financial markets. As an unintended consequence, the ESM is likely to act as a crisis accelerant rather than a stabilizer in the most likely case of requests for medium‐sized financial support from distressed ESM members at a time when other ESM countries might be unwilling or unable to provide new capital.

Suggested Citation

  • Christian Bauer & Bernhard Herz, 2020. "Reforming the European Stability Mechanism," Journal of Common Market Studies, Wiley Blackwell, vol. 58(3), pages 636-653, May.
    • Handle: RePEc:bla:jcmkts:v:58:y:2020:i:3:p:636-653
    DOI: 10.1111/jcms.12951
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    References listed on IDEAS

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    1. MENGUY, Séverine, 2010. "How to Limit the Moral Hazard Related to a European Stabilization Mechanism," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 252-275.
    2. Bálint L. Horváth & Harry Huizinga, 2015. "Does the European Financial Stability Facility Bail Out Sovereigns or Banks? An Event Study," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 177-206, February.
    3. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    4. Alexandra M.D. Hild & Bernhard Herz & Christian Bauer, 2014. "Structured Eurobonds: Limiting Liability and Distributing Profits," Journal of Common Market Studies, Wiley Blackwell, vol. 52(2), pages 250-267, March.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    6. Francis A. Longstaff & Arvind Rajan, 2008. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 63(2), pages 529-563, April.
    7. Ahrend, Rudiger & Goujard, Antoine, 2015. "Global banking, global crises? The role of the bank balance-sheet channel for the transmission of financial crises," European Economic Review, Elsevier, vol. 80(C), pages 253-279.
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    1. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).

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