As expected the Eurogroup presented their proposal for ESM reform ahead of the 13-14 December EU Summit. The ESM shall receive a larger role in designing, negotiating and monitoring financial assistance programs. In addition it shall act as a backstop for the Single Resolution Fund before 2024, provided that the banking sector shows sufficient risk reduction by 2020. The agreement moreover aims to improve the eligibility for precautionary credit lines extended by the ESM, but conditionality will remain strong. Countries will have to meet the quantitative benchmarks of the EU fiscal rules (i.e. a below 60% debt-to-GDP ratio and a deficit below 3% of GDP) and to comply with qualitative conditions related to the EU’s surveillance of macroeconomic imbalances (i.e. not experiencing excessive imbalances or being subject to the Excessive Deficit Procedure). The sustainability of general government debt further remains a key prerequisite for eligibility. Next steps are the proposal’s endorsement at the EU Summit and the necessary ESM Treaty amendments by June 2019. Meanwhile, no progress was made on the third pillar of the EU banking union, the European Deposit Insurance Scheme (EDIS). However, we expect a more concrete discussion after the EU Summit.
