This site has been archived on (2011/12/31)

European Commission - Economic and Financial Affairs -

Download PDF
Mail Alert
>  Economies of the Member States
>  EMU - Economic policy analysis and coordination
>  Financial operations and instruments

EU steps in with emergency financing for three member states

Romanian flag © European Communities
European Union crisis funding is available to Member States in distress. Such is the severity of the financial whirlwind that has hit the Continent, the emergency mechanism has already been triggered three times over the last eight months.

Technically known as ‘balance of payments assistance,’ the EU funding has amounted to € 15 billion and has been granted to three countries: Hungary, Latvia and Romania. To qualify, recipients have to have short-term balance of payments “difficulties” or need to be “seriously threatened with difficulties.” It is only available to Member States outside the euro area, of which there are eleven (see chart). With economic conditions worsening, the EU has had to raise the overall ceiling of available money twice. The original ceiling was lowered from € 16 billion to € 12 billion following the introduction of the euro before being brought back up to € 25 billion and more recently € 50 billion to ensure there was enough funding available if more Member States need help in the future.

Chart Source: European Commission

Funding comes in the form of loans and is usually granted as part of a package of aid put together with international institutions such as the International Monetary Fund and the World Bank. It is designed to ease a country’s external financing constraints, when a country cannot access the international capital markets at reasonable interest rates. The EU, with its first-class creditor status, steps in and borrows at favourable ‘AAA’ interest on world markets. The funds raised are passed on to the Member States in need, which benefit from the better EU credit rating. The aid, however, does not come without strings.


The EU, the international institutions and the government concerned come to an agreement on measures designed to overcome the country’s difficulties, which could for example include reform of taxation and spending or measures to increase administrative capacity so as to better absorb EU transfers. Implementation of these measures and the setting up of systems to guard against fraud are conditions for the aid payments, which are made in instalments. The loan should normally be repaid in about five years.

If a Member State fails to pay back its loans, the EU steps in as guarantor. This would involve the Commission calling on other Member States to send additional funds to the EU budget. This has never happened.

Quick decision-making is key throughout the process. Clear and swift statements of intent can in themselves sometimes be enough to calm market jitters.

International banking groups, which over recent years have made big profits in the new Member States, are expected to make their contribution to the multilateral support effort. In gentlemen’s agreements they pledge to maintain their exposure in the Member State concerned and to provide additional capital if stress tests indicate this may be necessary. Such commitments were made for Hungary, Latvia and Romania.

While the Commission suggests a course of action, it is ultimately up to the Council of Ministers to decide whether to approve a loan, as well as to define to length of time such support is available. The EU has been able to speed up decision-making with the cooperation of the Economic and Financial Committee and the Committee of Permanent Representatives (COREPER).

Loan agreements are standardised where possible to ensure equal treatment among Member States. The recipient country accepts to give the Commission ‘preferred creditor status,’ making any default less likely. This is necessary because periods of financial and political turmoil can lead to restrictions and controls on foreign currency payments.


Following a Council of Ministers decision on November 4 it was agreed to lend Hungary € 6.5 billion as part of a € 20bn package. The International Monetary Fund vouched to put up € 12.5 billion, and the World Bank EUR 1 billion. The first instalment, of € 2 billion, was paid in December and the second, also of € 2 billion, was paid in March. In the meantime the economic situation worsened and the programme was adapted. The 2009 deficit target, initially below 3% of GDP, was increased to almost 4% of GDP. Structural measures to improve the long-term sustainability of public finances were also agreed.


The Council decided on January 20 to lend Latvia € 3.1 billion of a total of € 7.5 billion. The remainder was pledged by the International Monetary Fund (€ 1.7 billion) the World Bank (€ 0.4 billion), Sweden, Denmark, Norway, Finland and Estonia together agreed to put up € 1.9 billion, and the European Bank for Reconstruction and Development, Poland and the Czech Republic another € 0.4 billion. A first instalment of € 1 billion was paid in February and a second one is expected in the second quarter of 2009 conditional on meeting the programme requirements. As with Hungary, Latvia’s programme is being adapted in the light of the worsening economic situation.


On May 5 the Council approved € 5 billion for Romania. In addition, the International Monetary Fund provided € 13 billion, the World Bank € 1 billion, and another € 1 billion was pledged by the European Investment Bank and the European Bank for Reconstruction and Development. Unlike the two previous cases, where the support packages responded to an acute crisis situation involving problems at systemically important banks (OTP in Hungary and Parex in Latvia), the financial assistance to Romania had a precautionary character and was designed to ensure continued macro-financial stability. The first instalment is expected to be paid by mid-July.

Further information

Further information

Balance of payments assistance

Decisions on financial assistance to Hungary, Latvia and Romania