Crisis Financing in the EU

The European financial architecture in an environment of liberalized capital markets, and the European monetary union with the euro and an effective Eurosystem on the one hand and a less developed economic union on the other hand have needed to undergo reform to build resilience to crisis. As the Stability and Growth Pact (SGP) had failed to adequately ensure the budgetary surveillance required under the EU treaties, it was revised and reinforced again in 2010 and 2011, and in addition supplemented by a new procedure designed to prevent macroeconomic imbalances. Moreover, a number of “financial assistance facilities” were created or expanded for EU or euro area countries to support them in managing crises that might result in contagion effects. The emerging difficulties of Greece created a need to ensure previously nonexistent crisis financing for euro area countries. In March 2009, the funding capacity of the EU’s balance of payments facility was raised to EUR 50 billion. Measures taken since May 2010 include the extension of bilateral loans to Greece and the creation of further financing mechanisms: the European Financial Stability Facility (EFSF: EUR 440 billion), the European Financial Stabilisation Mechanism (EFSM: EUR 60 billion) and the European Stability Mechanism (ESM: EUR 500 billion). With these mechanisms, the EU has built a framework for providing regional financial support alongside funding provided by the IMF at the global level.