The European Financial Stabilisation Mechanism (EFSM)

The European Financial Stabilisation Mechanism (EFSM) is a facility to provide loans to EU Member States in financial difficulty. It is financed by borrowing against the EU Budget (up to a total of €60bn); funds are then lent on to the countries concerned at an interest premium. The EFSM is not used independently, but forms part of a loans package, involving another EU facility (the European Financial Stabilisation Facility, or EFSF) and the IMF.

The UK is indirectly liable through its share in the EU Budget for loans made under the EFSM, and there has been some discussion about the process by which it became involved. The EFSM was originally agreed at an extraordinary meeting of the EU Economic and Financial Affairs Council on 9 May 2010, between the UK General Election and the formation of the Coalition Government. The then Chancellor consulted George Osborne and Vince Cable about the UK’s involvement in the EFSM, although the content of these discussions is disputed. Agreement on the EFSM was made by qualified majority, and the UK could not have unilaterally opted-out of the mechanism.

Thus far, the EFSM has been used to secure €22.5bn of loans to Ireland and €26bn to Portugal (only €8.4bn of these funds have thus far been disbursed), representing a third of the international element of their loans packages in each case.

From 2013, it is expected that the EFSM and EFSF will be permanently replaced by a €500bn European Stability Mechanism. This will be financed by guarantees from eurozone countries only, so it will not involve any liability for the UK. Outstanding debt issued under the EFSF and EFSM will remain within these frameworks until it is paid.