Reforming the European Stability Mechanism: Reform Objectives and Future Perspectives for Policy Conditionality in Times of Severe Crises in the Euro Area

On December 6th 2017, the European Commission proposed further reforms for the European Economic and Monetary Union. One of the key proposals was the establishment of a European Monetary Fund, which would be based on the European Stability Mechanism in its role as a fiscal safety-net for the euro area. A reform of the ESM was ultimately agreed upon by the Eurogroup in December 2018. It was further progressed in 2019 and is set to be concluded in 2020. The reform of the ESM falls short of establishing a European Monetary Fund. However, it enhances the ESM’s role in future financial assistance programmes, reforms its instruments, gives the ESM a stronger mandate to promote debt sustainability in the euro area, and includes the ESM in the backstop for the Single Resolution Fund. However, it remains unclear which effects for EMU governance a reformed European Stability Mechanism would ultimately have. Some point out that a reformed fiscal facility for the single currency is necessary, as the International Monetary Fund is becoming vary of its European commitments. They also highlight that further economic adjustments might be necessary to secure the institutional integrity of the euro area. Others point out that the socio-economic experiences with EFSF/ESM adjustment programmes are far from positive and need severe changes to be successful in future crises. The paper therefore aims at answering the question of what we can expect for EMU governance and future socio-economic crisis in the euro area from the reformed ESM. For this, the paper analyses the ESM reform process, illustrating different proposals and perspectives on the reform objective and the agreed reform. Secondly, it will draw on VoC theory to illustrate the different paths of economic development in the euro area, as well as the obstacles EMU poses on socio-economic heterogeneity, to highlight the complex socio-economic field that the ESM operate in. It will thirdly provide empirical evidence of the euro area’s experience with EFSF/ESM programmes for Greece and Ireland, based on socio-economic data, in-depth analysis of central documents related to the financial assistance programmes, as well as semi-structured interviews conducted in Greece, Ireland, and on the European level. The paper will trace the conditinality paths of the Irish and Greek programmes, will highlight central socio-economic developments as a consequence of the policy conditionality, and will present insights on the role of the ESM in these processes. Finally, the paper will conclude whether the reform of the ESM enables the institution to cope with the economic diversity in the euro area and how its reform changes the conditionality approach to financial assistance in the euro area.