The debt crisis in Greece and other countries using the single currency has triggered a wave of uncertainty about the future of the euro. In order to address these concerns and in an effort to ensure the stability and perseverance of the eurozone, the European Union has set up the European Stability Mechanism as a safeguard against future financial crises.

The main purpose of this mechanism is to provide financial backing to states in need...- David Casa

The ESM is expected to come into operation in July, a full year earlier than previously estimated. Created to replace the temporary European Financial Stability Facility and the European Financial Stabilisation Mechanism, the ESM will provide Europe with a much-needed permanent instrument of crisis management. There was no plan at the onset of the single currency for what action to take in the case of a crisis. It has become apparent that, for the eurozone to continue its existence, there must be a predesigned course of action for crises as well as mechanisms in place to prevent member states’ financial situations from getting out of hand.

The ESM provides a rescue fund for countries members of the eurozone, with paid-in capital of about €80 billion and an initial lending capacity of €500 billion (including the amount of outstanding EFSF stability support).

It is an intergovernmental institution, established under public international law and will be run by a board of governors appointed by each member state.

The main purpose of this mechanism is to provide financial backing to states in need, which may involve giving out loans or simply supplying precautionary financial assistance. The ESM has been criticised for giving too much power to the board of governors and for encroaching on the sovereignty of states.

The treaty establishing the ESM grants its officials immunity from prosecution and establishes that eurozone states must give the ESM money on demand within seven days of being asked.

There is also concern over moral hazards. If there is a safety net in place, ready to bail them out at any moment, what’s to stop member states from exercising irresponsible behaviour in the future?

Proponents of the ESM point to the fact that there are standards in place to prevent the mechanism from being abused. Financial assistance will not be given out lightly but, rather, on very non-concessional terms.

The ESM is necessary as a safeguard for the preservation of the eurozone as a whole, only to be utilised when it is imperative for the zone’s stability. In addition, the institution will function in close cooperation with the International Monetary Fund and will also be required to report regularly to the European Parliament.

The biggest contributors to the fund are Germany, France, Italy and then Spain. Malta’s share is expected to be €511.7 million, based on the temporary contribution rate of 0.0731 per cent. Alongside other member states, including Slovenia and Slovakia, Malta will have a transitional period of 12 years (from the date of accession to the eurozone) with compensated contribution.

The future allocation of funds is not yet determined (other than the billions already designated for the bailout packages of Greece, Ireland and Portugal) but it is useful to look beyond instant financial gratification and into the future.

The ESM will provide the stable environment that is necessary for much-needed growth in the eurozone. It implements economic surveillance to catch financial problems at an early stage and gives members in need the means to restore fiscal stability. This will allow countries to focus on increasing competitiveness while also encouraging a higher degree of economic integration.

While the creation of a permanent rescue fund is positive for the eurozone as a whole, it is not thought that Malta will be a recipient in the near future.

Our country remains, through the euro crisis, in good economic standing, thanks to the stability of our banking system. Our unemployment rate is the fourth lowest in the EU, standing at 5.7 per cent last April.

The immediate beneficiaries of the ESM will be those in severe financial crunches, such as Greece and Portugal, whose economies’ improvement is vital for the eurozone’s survival. After the dispensing of funds necessary at present, the demand for ESM aid will hopefully decline.

Thankfully, most countries, Malta included, do not urgently require the assistance of the ESM. Still, it is comforting to know that there are means in place to preserve the security of a currency that interconnects us all.

Mr Casa is a Nationalist member of the European Parliament.