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Glossary: reform of the Economic and Monetary Union

Reform of the Economic and Monetary Union (EMU)

Set of measures to improve the functioning of the euro area.

In June 2018, the Euro Summit gave the Eurogroup a mandate to further strengthen the existing EMU setup.
The mandate included:

  • strengthening the banking union
  • the reduction of risks in the banking sector
  • the introduction of a common backstop for the Single Resolution Fund to be provided by the ESM
  • and the development of financial assistance instruments and the role of the ESM

The Eurogroup also discussed various ideas to build up a fiscal capacity for the euro area. On 4 December, the Eurogroup adopted a comprehensive report that was submitted to the leaders ahead of the Euro Summit of 14 December.

Banking Union

Bail-in: mechanism through which the costs of rescuing a bank which is failing or likely to fail are first and foremost borne by its shareholders and creditors, and not by taxpayers’ money (bail-out).

Banking Union: EU level banking supervision and resolution system which operates on the basis of EU-wide rules.

ESM backstop to the SRF: to be used in the event of a bank resolution in case resources available in the SRF are insufficient. Funds lent by the backstop will be reimbursed by the banking sector. The backstop would be provided by the European Stability Mechanism.

European Deposit Insurance Scheme: Commission proposal aimed at providing a stronger and more uniform protection of deposits in the euro area. The goal would be to establish a single common scheme which would insure all deposits in the banking union up to €100 000.

Minimum  requirement  for  own funds  and  eligible  liabilities (MREL): minimum amount of capital and liabilities that a bank must hold to absorb losses and to recapitalise in the event of failure. It is a key instrument enabling the orderly resolution of failing banks without threatening the stability of the financial system.

Non-performing loans: a bank loan is considered non-performing when more than 90 days pass without the borrower paying the agreed installments or interest. 

Single Resolution Fund (SRF): fund used to help resolve failing banks. It is entirely financed by the banking sector.

Single Resolution Mechanism: system for the orderly resolution of failing banks with minimal costs to taxpayers and to the real economy. It is comprised of a central resolution authority within the banking union, the Single Resolution Board and the Single Resolution Fund.

Single Supervisory Mechanism: common system through which banks are supervised in the EU. The ECB has direct oversight of the most significant eurozone banks, while less significant banks remain under the supervision of the national banking authorities with the ECB playing a monitoring role.

Reform of the European Stability Mechanism

Debt restructuring: process that allows an entity, private or public, in financial distress to reduce or renegotiate a debt that it is not in a position to repay in order to improve or restore liquidity so that it can continue its operations.

European Stability Mechanism (ESM): international financial institution providing financial assistance to euro area countries experiencing or threatened by severe financing difficulties. Overall, it has a total lending capacity of €500 billion.

Lending toolkit: set of instruments currently at the disposal of the ESM to perform its mission: loans within a macroeconomic adjustment programme, purchases on markets (primary and secondary), precautionary credit line, loans for direct and indirect bank recapitalisation. So far, only loans within a financial programme and indirect bank recapitalisation have been used.

Precautionary credit line: financial assistance granted by the ESM to a country before it experiences difficulties raising funds in capital markets, in order to prevent crisis situations. It can be drawn via a loan or the issuing of a new stock or bond. There are two types of precautionary credit lines:

  • precautionary conditioned credit line (PCCL): available to a member state whose economic and financial situation is fundamentally sound, as determined by respecting six eligibility criteria such as public debt, external position or market access on reasonable terms.
  • enhanced conditions credit line (ECCL): available to a member state whose economic and financial situation remains sound but that do not comply with the eligibility criteria for PCCL. The use of the ECCL is conditioned to the adoption of corrective measures to avoid future problems in respect of access to market financing.

Single-limb Collective Action Clauses (CACs): legal rules for sovereign bonds that make debt restructuring more orderly and predictable. They reduce the risk of a small group of bondholders deciding not to take part in the restructuring and forming a minority to block it, in the hope of getting a better deal for themselves (creditor holdout problem). These "holdouts" can lead to delays in resolving the crisis. Finance ministers of the euro area intend to introduce these rules by 2022 and to include this commitment in the ESM treaty. 

Instrument for competitiveness and convergence

Proposal to create a budgetary instrument with the aim of fostering economic convergence enhancing competitiveness in euro-area member states. This instrument would be part of the EU budget.