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The EU Crisis Prevention Mechanisms: A Road to Salvation … or Perdition?
Rodrigo Olivares-Caminal, Professor in Banking and Finance Law, Queen Mary University of London, UK1. Introduction
The introduction of the euro was accompanied by increased intra euro-zone financial interdependence and, as it has turned out, some financial fragilities and risks that have only become apparent under crisis conditions. Thus a euro-area specific issue seems to have emerged as a component of the broader evolving international state of affairs.
In a number of countries the turmoil in the banking sector in the aftermath of the subprime mortgage crisis and the credit crunch seems to have only been tempered by large infusions of government financial intervention that, in turn, aggravated the sovereign debt picture. For some European countries the deterioration in borrowing conditions seemed to go beyond what underlying economic fundamentals might have called for in more normal times.
The euro-area member states (EAMSs) are of particular interest as they have been at the epicentre of the sovereign debt crisis and there have been important spill over effects from one EAMS to another, to the point that the stability of the euro-area as a whole has been called into question. Greece, Ireland, Portugal, Spain and Cyprus for example, have had to seek financial assistance from the European Union (EU), other EAMSs, the IMF, the European Central Bank and non-EAMSs countries in attempts to rectify public sector finances and to reduce their debt burden in an orderly manner.
This article analyses the build-up of the Greek crisis and the emergence of the EU temporary crisis prevention mechanisms, i.e. the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF). Then, it analyses the main features of the financial assistance programmes granted to Ireland, Portugal, Greece and Spain and the emergence of the EU permanent crisis prevention mechanism, i.e. the European Financial Stability Mechanism (ESM). Finally, some concluding remarks are provided.
2. The first Greek bail-out
In April of 2009, the European Council adopted a decision according to Article 126 of the Treaty on the Functioning of the European Union (TFEU) on the existence of an excessive deficit in Greece. The Greek government deficit for 2009 was 12.7% and its debt to GDP ratio 113%, both well above the convergence criteria set by the Treaty on European Union (also known as the Maastricht Treaty). In December 2009, following article 126(8) of the TFEU, the European Council stated that Greece had failed to comply with its recommendation issued in April 2009 when an excessive deficit procedure was initiated. On 16 February 2010, on the 2994th meeting of the Economic and Financial Affairs (Ecofin) Council it was decided to (1) give notice to Greece to remedy its excessive deficit by 2012 setting budgetary consolidation measures according to a specific timetable; and, (2) to bring its economic policies in line with the EU broad economic policy guidelines and remove the risk of jeopardising the proper functioning of the economic and monetary union (EMU).
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