On 6 December, the European Commission unveiled a roadmap for deepening Europe's Economic and Monetary Union (EMU). The package features a number of initiatives, including a proposal to transform the European Stability Mechanism (ESM) into a European Monetary Fund (EMF). The European Monetary Fund would, among other things, provide a common backstop to the Single Resolution Fund (SRF). It would act as a last resort lender to facilitate the resolution of distressed banks. The backstop would be part of the new budgetary instrument for the euro area, which is another of the initiatives put forward.

Safety net

A financial backstop is a sort of 'safety net', which would only be activated as a last resort if the Single Resolution Fund does not have the resources to deal with a serious bank crisis. Speaking at the unveiling of the roadmap, European Commission President Jean-Claude Juncker said the aim of the backstop would be to ''shield our taxpayers from paying for a failing bank''. He stressed that this would strengthen trust in the stability of the euro, adding that ''it is an essential element of completing the Banking Union''.

The creation of a backstop for the Single Resolution Fund was agreed by EU Member States in 2013. The backstop should be fiscally neutral – in other words, any pay-out should be recouped from the banking industry – and large enough to act as a credible safety net. It would be open to non-euro Member States that are part of the banking union. And funds should be available quickly when a bank is resolved.

More efficient and transparent

The European Monetary Fund will essentially keep the current financial and institutional structure of the European Stability Mechanism, while making it more efficient and transparent. It will continue to raise funds on financial markets. And with an overall lending capacity of €500 billion, the fund will have access to the same financial resources as the European Stability Mechanism. As part of its new role as backstop, the European Monetary Fund will provide a credit line or guarantees (or both) to the Single Resolution Board.   

The Commission's proposal for a common backstop represents a significant step in the EU's ongoing project to create a banking union. In particular, it underpins efforts to promote risk-reduction and risk-sharing measures in the EU banking sector. For the banking union to work, it is essential that risks are spread more broadly among investors and across borders.  At the same time, the importance of reducing risks in some EU countries is also crucial. Both of these issues were highlighted in a communication the Commission published in October 2017. The communication was intended to steer the political discussion with the view of completing the banking union by 2019, the end of this Commission's mandate (see previous article).

The Commission's proposals coincided with the publication of a Flash Eurobarometer, which shows that 64% of citizens in the euro area think that the euro is a good thing. This is an increase by eight percentage points compared to last year and the highest score since the introduction of the euro notes and coins in 2002.

In terms of timing, the goal is that the European Parliament and Council would reach an agreement by mid-2018 and the backstop would become operational by 2019.

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