Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

The purpose of this legislation is to seek the approval of the Oireachtas to ratify two amending agreements agreed by the Eurogroup last November, with the objective of strengthening the crisis resolution capabilities of the euro area. In summary, the two amending agreements provided for the reform of the European Stability Mechanism, ESM, as well as the introduction of the common backstop to the Single Resolution Fund, SRF, from January 2022, two years ahead of schedule. I will provide more detail on the content of the amending agreements, as well as the Bill, during the course of my opening statement. This represents a significant political development following protracted political discussions and is a substantial milestone in the development of economic and monetary union.

The background is that the ESM treaty was originally signed on 2 February 2021, establishing the ESM as an international financial institution to be funded by capital contributions from ESM members. Our participation in the ESM was approved by the Oireachtas in 2012. The direct recapitalisation instrument was designed at the height of the euro area crisis when the banking union was still in its infancy. As the House is aware, this instrument has never been used and has to a great extent become outmoded due to the development of the bank resolution legal and institutional framework.

On 18 December 2013, Ministers agreed on the need for a common backstop to the SRF. At the euro summit of June 2018, Heads of State and Government agreed the ESM would provide the backdrop to the SRF itself. Leaders then asked the Eurogroup to continue with work on this. This is what we did and, leading on from that, in December 2018, the terms of reference for the common backstop were then agreed by Heads of Government.

What is in this proposed treaty reform? There are four complementary and mutually enforcing building blocks. The centrepiece of ESM treaty reform is the establishment of a common backstop to the SRF, with the ESM as the provider. It will be available as a last resort to support effective and credible crisis management within the Single Resolution Mechanism, SRM. Loans from the backstop to the SRF will be repaid via contributions from the European banking sector. There will be no use of taxpayers' money. The size of the credit line will be aligned with the level of SRF funds, which is set at 1% of the deposits in the banking union, with a cap of €68 billion.

The second element is the early introduction of a common backstop. The Eurogroup agreed to the entry into force of the common backstop two years ahead of schedule, at the beginning of 2022. This is a very significant development and an important step towards completing banking union.

The intergovernmental agreement established a transitional period of eight years, during which time national contributions would be progressively mutualised into a common fund. In other words, in the early years of this agreement, levies collected nationally were to be ring-fenced, applied for the benefit of institutions from the relevant States that are making the contribution. These are referred to as national compartments. These compartments are being steadily mutualised and will be fully mutualised by 2024. A point to note is if there is no recourse to the backstop during the remaining term of the transitional period, there will, in effect, have been no substantive change to the resolution framework.

Following the November agreement, EU ambassadors signed the amending agreements to the treaty in January 2021. My Department received legal advice that the legislation that implemented the original agreement should be amended. That is why we are in the Seanad today. The early introduction of the common backstop will bring real benefits and real stability to the European banking sector. It will protect taxpayers' resources. The size of the contribution that will be supplied by each member state was estimated in November 2014. Ours will be, or was at that point, €1.815 billion. However, following a review of risks in the European banking system our contribution was revised downwards to €815 million.

The second element is the reform of the precautionary conditioned credit line, PCCL. This involves the modernisation of the ESM's financial assistance toolkit. This credit line is being reformed to enhance its effectiveness in order to prevent minor crises from developing into more serious ones. This is fundamental to any ESM member whose economic and financial situation is fundamentally sound, but could be affected by a shock that may end up being beyond its control.

The third element of treaty reform provides for a stronger future role for the ESM in the design, negotiation and monitoring of future financial assistance programmes. The existing treaty allocates the various tasks in the ESM's operations to the European Commission, the European Central Bank, ECB, and the International Monetary Fund, IMF. The reality is the IMF, over time, has stepped back from this work. The treaty amendment regarding the enhanced role of the ESM is, therefore, necessary so there is certainty regarding the roles of the institutions should a member state require assistance.

The fourth and final element of ESM treaty reform concerns the debt sustainability framework in the context of ESM financial assistance. A key principle of the ESM since its establishment is that financial assistance should only be provided by the ESM to member states whose debt is considered sustainable.Three improvements are being made. First, a new common methodology for conducting the debt sustainability analysis of a prospective programme country has been jointly developed by the European Stability Mechanism, ESM, and the European Commission. The second is an improvement to the debt sustainability framework via the introduction of single-limb collective action clauses. This allows for changes to the terms of the bonds to be made subject to a vote by the holders of the bonds. If a majority approves a change, it becomes effective for all the bonds. The final improvement involves changing the role of the ESM to facilitate dialogue between a member state and its private investors.

I will quickly address the content of the Bill. Section 1 deals with definitions in the legislation. Section 2 provides for the approval of the ratification of the agreement amending the treaty establishing the European Stability Mechanism by the Oireachtas. Section 3 provides for an update of Ireland's paid-in capital to the ESM following the end of the temporary correction periods for three of the founding ESM members, Malta, Slovakia and Slovenia. This section also provides for amendments to the European Stability Mechanism Act 2012, including a new definition of "Treaty".

Section 4 provides for amendments to the European Stability Mechanism (Amendment) Act 2014. Section 5, titled "Approval of terms of Intergovernmental Agreement", provides for the approval of the ratification of the Single Resolution Fund intergovernmental agreement amending agreement. Section 6 provides for amendments to the Finance (Miscellaneous Provisions) Act 2015 and redefines "Agreement" in the legislation. Section 7 provides that any expenses incurred by the Minister in the administration of this Act shall be paid out of moneys provided by the Oireachtas. Section 8 is a standard section defining the short Title of the Bill.

There are three Schedules in this Bill, each composed of two parts. Schedule 1 is the amending agreement to the Treaty establishing the European Stability Mechanism. Schedule 2 is the text of the treaty. Schedule 3 is the intergovernmental agreement.

As I mentioned at the outset, the purpose of this Bill is to seek the approval of the Oireachtas to ratify two amending agreements agreed by the Eurogroup last November. That agreement to reform the ESM treaty and to bring forward the common backstop to the Single Resolution Fund is an important step forward. When the agreement is implemented early next year, it will make our monetary union more resilient, will boost confidence in tour ability to quell a crisis before it develops and will strengthen the crisis resolution capabilities of the euro area, should they be required. I will conclude my opening remarks here and look forward to the debate.