The German cabinet has recently approved legislation to ratify the treaty creating the European Stability Mechanism (ESM) and backed a bill authorizing Germany to contribute to the ESM, thereby establishing the requisite domestic conditions for a new, permanent financing mechanism.
The ESM is to be ratified in all euro countries by the end of June and be ready to provide financial assistance from July onwards.
In its statement, the German finance ministry explains:
“The ESM is part of a comprehensive package to stabilize the euro zone. Together with the fiscal compact – endorsed by cabinet last week for ratification – it will equip the euro area to improve the stability of the monetary union on a lasting basis.”
“The ESM and fiscal compact are closely linked. Any euro country wishing to claim ESM assistance will have to have ratified the fiscal compact and implemented it within a set deadline.”
“In the medium-term, the ESM is to assume the tasks of the temporary European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF) created in 2010.”
The ministry underscores that by adopting the ESM Ratification Act, the Bundestag and Bundesrat will give their approval to the international ESM Treaty.
The ministry points out that the legislation also sets out the conditions for possible changes to the ESM Treaty in future. Core decisions such as those to increase the ESM’s capital stock or change the financial assistance instruments available to the ESM will have to be accompanied by new law in Germany, it adds.
According to the ministry, the ESM will be equipped with an authorized capital stock of EUR700bn (USD922bn), comprising EUR80bn of paid-in capital and EUR620bn of callable capital. In line with its ECB capital key, Germany will contribute EUR21.7bn of paid-in capital and EUR168.3bn of callable capital.
Alluding to the fact that the first two of a total five paid-in capital instalments are to be provided by euro members in 2012, and that Germany’s 2012 contribution will be approximately EUR8.7bn, the ministry explains that the legal basis to do that will be provided by a supplementary budget for this year, which is expected to gain cabinet approval on March 21, 2012.
The ministry states that the paid-in and callable capital gives the ESM collateral so that it can go to the market to raise the funds it needs to provide any financial assistance. Germany’s liability is restricted to its share, made available under law, of the ESM authorized capital stock.
The ministry notes that: “The ESM Financing Act is also to regulate parliament’s rights on future ESM decisions. The government bill explicitly avoids any proposed wording on this, leaving that to the German Bundestag. The bill is furthermore to incorporate the principles set out in the Federal Constitutional Court ruling of February 28 concerning the use of a special Bundestag panel."
The ministry reveals that the cabinet has also approved legislation amending the law on federal debt management.
The legislation states that from January 1, 2012, collective action clauses are to be added to euro country government bonds. The obligation to do this stems from the ESM Treaty. The euro countries’ debt management bodies agreed on the content of the clauses and the legal impact is the same throughout the legal systems of the euro area. Subject to a majority decision on the part of the creditors, the collective action clauses will enable a government to reschedule if there is a risk of default..
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