The European Stability Mechanism: A Safety Net for the Euro Area
This is an abridged version of the interview given by Pierre Gramegna, Managing Director of the European Stability Mechanism, to Jérôme Bloch on 11 March 2025.
Jérôme Bloch: Today, I have the pleasure to visit the ESM studio to interview Pierre Gramegna. Thank you for taking the time.
Pierre Gramegna: Nice to meet you again, Jérôme. It is a pleasure.
J.B.: It is a pleasure too. We all know the ESM is in Kirchberg, and the name is familiar -European Stability Mechanism. And stability has become a very important topic. Could you present the ESM in a few words?
P.G.: Yes. The ESM is headquartered in Luxembourg - Kirchberg, to be precise, just behind Auchan. Many people still ask me if we are based in Brussels, probably because I travel there regularly to attend Eurogroup and Ecofin meetings. But the ESM's home is here. It was born out of a crisis, the great financial crisis. The European Financial Stability Facility (EFSF) was created first as a temporary structure in 2010, and it was headquartered in Luxembourg. Thanks to Luxembourg’s legal framework, the efficiency of its financial centre, and the country’s AAA rating, it made sense. When the euro was created in 1999 and banknotes followed in 2002, the system was incomplete. The euro area lacked a lender of last resort. The euro needed a safety net. That led to the creation of the ESM in 2012. We now have 20 member states, the euro area countries. If Bulgaria joins the euro next year and ratifies the treaty, it will be our 21st member.
J.B.: So how do you get the money in the fund?
P.G.: The ESM is unique. Unlike the IMF, which acts globally, our 20 countries have subscribed over €700 billion in capital. €81 billion of that is paid in. We manage these funds daily. With that, we can borrow up to €500 billion in the financial markets at a AAA rating. So, when countries cannot access markets, we can step in and provide cheaper funding. It is a powerful backstop.
J.B.: It is like a pool. You are pooling resources to get better rates.
P.G.: Exactly. Better access, better rates.
J.B.: I read recently that there is talk of using Russia's frozen assets, some €230 billion. As a citizen, that sounds... extreme. From your position, which kind of monetary instability could you anticipate? Are we approaching a last-resort scenario?
P.G.: It is important to remember the ESM was created in the context of a deep crisis. But instability does not always come from financial shocks. During COVID, for instance, lockdowns had massive financial implications. That can also trigger financial instability. Today, we face geopolitical fragmentation. War in Ukraine is not just tragic, it is destabilizing. It creates risk. We must be ready.
J.B.: With the Draghi and Letta Reports on the table, what kind of strategy can the ESM implement? Can you raise more money in advance?
P.G.: The ESM is like insurance. You are glad to have it when you need it, but even when you do not, you do not cancel the policy. The ESM is a stabilizer in good and bad times. While we have used traditional support programs in the past - like for Greece - we also have precautionary credit lines. These are preventive and could be activated faster and with lighter conditions before an actual crisis emerges. The IMF has similar instruments, but they are usually less used by countries.
“The ESM is like insurance. You are glad to have it, even when your house does not burn.”
J.B.: So, you advocate for readiness? Acting before it is urgent?
P.G.: Exactly. We analyse risks across the euro area, not just in one country. The obvious risks are geopolitical. But there are two other major longer-term risks whose financial consequences might be overlooked: climate change and demography. Climate change affects insurance, asset valuation, and stability. Look at the wildfires in California, the floods in Valencia... these are not just environmental issues. Demography is another one. Europe’s working-age population is shrinking. Today, 3 people work to support 1 retiree. By 2050, that will drop to 2. This is a big problem.
J.B.: One other factor: volatility. A few years ago, weapons were not ESG-compliant. Now, we are rethinking that. Oil is back. Even electric cars are stalling. What about the growing political fragmentation in Europe?
P.G.: Europe has weathered many storms. Each time, we have emerged stronger. The ECB conducted accommodative monetary policy and introduced groundbreaking monetary policy tools. During COVID, the EU built the Next Generation EU fund. But yes, extremes on both the left and right might challenge the possibility of a united European response to crises in the future. We must explain better. We must not take solidarity for granted. Democracy allows for dissent. But that also means it is on us to communicate.
J.B.: Let us talk about the Draghi Report. Bold vision: €800 billion investment per year. How can we afford that?
P.G.: The report warns about Europe’s lagging competitiveness. You could say that in the last 10 years, U.S. GDP grew by nearly 30%; Europe, just by 17%. This is worrying, if this trend were to continue. Of the €800 billion, most must come from private investment. But around 20-25% will require public funding. That is a challenge with tight national budgets. Thankfully, the new Stability and Growth Pact provides more room for investment. The European Commission recently released a Competitiveness Compass. It is a step forward.
J.B.: I saw a report from Serge Alegrezza showing Luxembourg’s competitiveness has dropped while Europe grew. And the CEO of Michelin even said France is the hardest place in the world for them to operate.
P.G.: Luxembourg’s dip is linked to its service economy, especially finance, which suffered during COVID and because of ultra-low interest rates. I think that the services sector, and especially for Luxembourg, the finance sector, is in better shape now. So, we will have a kind of mechanical improvement here in Luxembourg. If you compare Luxembourg to France, what the CEO of Michelin was saying is that the non-wage part of salaries, that means contributions to health and to pensions and other social taxes that are levied on the salaries, is extremely high. That is not the case in Luxembourg. Basically, in France, you need to pay more than double as an entrepreneur, and the employee receives half. That hurts competitiveness. But the Danish model for instance shows that high protection and high productivity can coexist.
J.B.: Final point: the Letta Report and Capital Markets Union. Is it a threat or opportunity for Luxembourg?
P.G.: A great report on the EU Single market. The title says it all: “Much More Than a Market". The single market is one of Europe’s best achievements, but it needs updating. We need to look at it with the eyes of 2025, with the challenges of the economy today and the new types of hurdles that exist, that are very sophisticated and of a different nature. Removing internal EU barriers helps all countries, including Luxembourg. Companies can grow with scale. A U.S. company has its domestic market. So should Europe. According to research by the International Monetary Fund, reducing internal barriers in the single market by just 10% would boost GDP by up to 7%. That is massive. As the U.S. imposes tariffs, we must boost internal EU trade. Enrico Letta also suggests using the ESM to support countries struggling to meet NATO’s 2% of GDP defence spending goal through a precautionary credit line. That is an interesting proposal, and the ESM is ready to work on this with its members.
J.B.: To conclude, I think back to where it all started, in Schengen. Let us hope Luxembourg continues to act as a catalyst between France and Germany, bringing those big ideas to life.
P.G.: It was a pleasure. Thank you, Jérôme.
©Laurent Antonelli – Blitz