EU leaders will agree this week to insert two sentences into the EU treaty to pave the way for the creation of the European Stability Mechanism (ESM) from 2013, draft conclusions of the summit showed.
The ESM is to open the way for private sector investors to take a loss in case of a sovereign debt restructuring, which will put market pressure on governments to conduct sound fiscal policies and prevent another debt crisis.
It would also provide financial support to eurozone countries which suffer liquidity, but not solvency problems, through a fund that is likely to be bigger than the current 750 billion euro (US$992.25 billion) bailout fund.
However, to create the ESM, Germany and France insisted that the EU’s highest law, the EU treaty, has to be amended so that its operations are not deemed unconstitutional by German courts.
The conclusions said leaders of the 27-nation bloc would agree to amend the treaty by adding the following sentences to the existing article 136: “The Member States whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.”
The ESM will be based on the agreement reached by eurozone finance ministers on Nov. 28.
The leaders, who meet on Thursday and Friday in Brussels, will also agree that the ESM would replace the European Financial Stability Facility and the European Financial Stability Mechanism, which will be operational until June 2013. They would like consultations with the European Parliament, the European Commission and the European Central Bank on the change to the treaty to end in March next year and for approvals in individual countries to finish by the end of 2012.