In the light of the sustained sovereign tensions and the economic and financial difficulties experienced by euro area Member States, policy makers decided that a permanent resolution mechanism able to provide financial stability support would be needed to address instances when euro area Member States are either threatened with or facing difficulties with respect to their financial instability that would pose a threat to stability of the European Union as a whole.
The ESM is a permanent international financial institution that assists in preserving the financial stability of the European Union monetary union by providing temporary stability support to euro area Member States. The Treaty Establishing the European Stability Mechanism was signed on 2nd February 2012, establishing the ESM as an intergovernmental organisation under public international law. The ESM was finally inaugurated on 8 October 2012 upon completion of the ratification process by the participating euro area Member States. The ESM will be the primary support mechanism to euro area Member States.
The ESM will issue bonds or other debt instruments on the financial markets to raise capital to provide assistance to Member States. Unlike the EFSF, which was based upon euro area Member State guarantees, the ESM will have total subscribed capital of €700 billion provided by euro area Member States. €80 billion of this will be in the form of paid-in capital with the remaining €620 billion as callable capital. This subscribed capital will provide a lending capacity for the ESM of €500 billion.
Financial assistance from the ESM will in all cases be activated upon a request from a Member State to the Chairperson of the ESM's Board of Governors and will be provided subject to conditionality appropriate to the instrument chosen. The initial instruments available to the ESM have been modeled upon those available to the EFSF:
Each instrument will be linked to a Memorandum of Understanding that details the appropriate conditions a Member State has negotiated with the European Commission, in liaison with the European Central Bank, for financial support as well as the monitoring and surveillance procedures to ensure a Member State is progressing towards financial stability.
Overall, the ESM provides substantial advantages for all participants, thanks to its more robust capital and enhanced governance structure. It will be able to react quickly and decisively to financially support Member States in difficulty; it will be more insulated from the rating migration of Member States; and assistance provided by the ESM will not be rerouted to Member States in public finance statistics.