The European Stability Mechanism is a permanent rescue funding program to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in the 17-member Eurozone. The ESM is due to be launched as soon as Member States representing 90% of the capital commitments have ratified it, which is expected in July 2012.
Following the European sovereign debt crisis that resulted in the bailout of EU states, there has been a drive to reform the functioning of the Eurozone in the event of a crisis. This led to the creation, amongst other things, of a bail-out mechanism: the European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM).
These, together with the IMF, would bailout EU states in trouble. However, the EFSF and EFSM were intended only as a temporary measure (to expire in 2013), in part due to the lack of a legal basis in the EU treaties.
In order to resolve the issue, the German government felt a treaty amendment would be required. After the difficult ratification of the Treaty of Lisbon, many states and statesmen opposed reopening treaty amendment and the British government opposes changes affecting the United Kingdom.
However, after winning the support of French President Nicolas Sarkozy Germany won support from the European Council in October 2010 for a new treaty. It would be a minimal amendment to strengthen sanctions and create a permanent bail-out mechanism.
It would not fulfill the German demand to have the removal of voting rights as a sanction as that would require deeper treaty amendment. The treaty would be designed so there would be no need for referendums and for it to come into force in July 2012. It will run one year parallel to the temporary bail-out mechanism, which expires 2013. European Council President Herman Van Rompuy is to explore the changes through the simplified revision procedure.
On 16 December 2010 the European Council agreed a two line amendment (see below) to the treaty that would avoid any referendums. It would simply change the EU treaties to allow for a permanent mechanism to be established. In March of the following year leaders also agreed to a separate Eurozone-only treaty that would create the ESM itself.
In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play 'a central role' in running the ESM, despite wishing it had been more involved earlier.
On 16 December 2010 the European Council agreed a two line amendment. The text is being inserted into Article 136 of the Treaty on the Functioning of the European Union as paragraph 3. The amendment reads:
“The member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
In addition to that amendment the European Stability Mechanism itself will be established by a treaty among the euro-zone states: the Treaty Establishing the European Stability Mechanism. Formally, two treaties with this name were signed: one on 11 July 2011 and one on 2 February 2012. The second version was produced to "make it more effective". It is expected that only the 2012 version will be ratified by a sufficient number of member states and enter into force in July 2012.
According to this treaty, the European Stability Mechanism will be an intergovernmental organisation under public international law and will be located in Luxembourg. It would be open to other members to join and would be led by a Board of Governors. Each state would appoint a governor and the board would either be chaired by the President of the Euro Group or by a separate elected chair from amongst the governors themselves.
Treaty establishing the European Stability Mechanism between the Kingdom of Belgium, the Federal Republic of Germany, the Republic of Estonia, Ireland, the Hellenic Republic, the Kingdom of Spain, the French Republic, the Italian Republic, the Republic of Cyprus, the Grand Duchy of Luxembourg, Malta, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic and the Republic of Finland.