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Euro zone agrees to overhaul bailout fund in a move likely to appeal to investors

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Key Points
  • The euro zone's finance ministers took a key step in bridging financial differences.
  • The move could reassure investors who have been worried about the financial discrepancies between euro zone countries.
  • However, a wider plan toward further integration is far from being completed.
Eurogroup president Paschal Donohoe, on the screen, speaks during an online news conference following an Eurogroup video conference.
FRANCISCO SECO | AFP | Getty Images

LONDON — Euro zone finance ministers have agreed to strengthen the region's crisis bailout fund — a long-awaited step that addresses how investors view the region.

The 19-member area is often criticized for not tackling the disparities among its economies. The differences between southern nations, which tend to have high levels of government debt, and the more fiscally hawkish northern countries have caused tensions when the euro zone was trying to address its sovereign debt crisis in 2010.

The bloc's finance ministers took a key step Monday in bridging these differences.

They agreed that the European Stability Mechanism, created in 2012 to provide funds to nations that needed bailouts, should play a stronger role in the design and implementation of future bailout programs — a task that the European Commission, European Central Bank and International Monetary Fund shared at the height of the debt crisis.

The talks have been stuck on this issue for a year, given political and financial differences between countries, but the move is expected to receive approval from national parliaments next year.

The move could reassure investors who have been worried about the financial discrepancies between euro zone countries, and the risks these could pose for their investments.

"It's been really difficult," said Paschal Donohoe, who chairs the meetings of the 19 ministers.

The euro region is facing a deep economic crisis on the back of the coronavirus pandemic. This could ultimately pose risks to the region's banking system as well.

What has been agreed?

As well as playing a larger role in future bailouts, the latest agreement allows the ESM to be a backstop to the Single Resolution Fund, which provides support to failing banks in the euro zone. This backstop will be made available in 2022, two years earlier than initially planned.

"The backstop is a last resort, it is a further safety net at our disposal should we need it," Donohoe said.

"It will reinforce and complement the resolution pillar of the Banking Union, and it will help to ensure that a bank failure does not harm the broader economy or indeed cause financial instability."

The euro zone's Banking Union aims to make its banking system stronger and better supervised. This has been an issue in the past when the global financial crisis raised worries about contagion risks from one euro zone country to another.

The plan agreed by minsters this week includes further steps, including negotiations for a European Deposit Insurance Scheme, which would protect retail banking deposits across the region. However, this remains a sensitive issue from a political perspective, with some nations worried this could put their taxpayers at risk when a bank in another euro zone country collapsed.

Paolo Gentiloni, the European commissioner for economic affairs, said the region is "not at the end of this road," hinting that more work needs to be done to finish the Banking Union.