December 12, 2010

EU Treaty to Change to Stabilize Euro

Leaders to formalize position this week on terms to create stability mechanism

European leaders will amend the European Union (EU) treaty this week to accommodate the creation of a permanent European Stability Mechanism (ESM) that will begin in 2013.

According to a Reuters report, the summit gathering decided in favor of inserting two sentences into the EU treaty that will allow the new ESM. It will not only present the possibility of investors absorbing some losses in case of a sovereign debt restructuring but will also put pressure on governments to focus on sound fiscal policy and hold off another debt crisis.

The ESM will most likely offer support to nations with liquidity problems through a larger fund than that which is currently available. However, France and Germany insisted on the treaty amendment to forestall any declarations by the German courts that such a mechanism is not unconstitutional.

The following sentences are to be added to existing article 136: “The Member States whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.”

Leaders said that the amendment did not increase the powers that member states have granted to the EU, and therefore would neither require a referendum in Ireland nor cause Britain any concern over possible transfer of power to Brussels.

The 27 member nations’ leaders, who will meet in Brussels on Thursday and Friday, agreed that the ESM will replace the existing European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM) in 2013; until that time, the EFSF and EFSM will remain functional.

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