Callable Capital

In December 2010, Re-Define produced one of the first blueprints for the European Stability Mechanism "An Optimal Design for the ESM" targeted at EU policy makers. After more than six months of discussions and political wrangling, today the ESM treaty was signed in a ceremony in Brussels. Now is an ideal time to evaluate the final shape of the ESM and to compare it to our blueprint. This short policy commentary, part of our new series of publications, aims to do exactly that. First we highlight the proposals Re-Define made, then we discuss what the ESM treaty actually provides for.

The legal form
Re-Define suggested that though it may be preferable embed the ESM in the legal structure of the EU (as is the case for the European Investment Bank), it was probably much easier to set it up as an international financial institution based on an intergovernmental treaty between Euro area member states using the EBRD as a model.

This is the model the Euro area member states have chosen and the ESM will be set up as a treaty based international financial institution located in Luxembourg with Euro area member states as members.

The size
Re-Define suggested that the ESM should have a lending capacity that is enough to meet around a third of the Euro area's sovereign issuance for a period of two years – between Euro 600 bn and Euro 750 bn. We also suggested that an upward flexibility should be included in the agreement in case of contingencies.