Euro-area reforms will reinforce fiscal consolidation

Significance

The reforms would allow the ESM, which provides emergency loans to distressed member states, to offer greater assistance to banks and enhance its capacity to design and implement bailout programmes. They will enter into force once ratified by national parliaments.

Impacts

• The reforms will boost confidence in EU markets and reduce the risk of contagion from bank failures.
• The ESM will remain politically divisive, especially in southern European countries.
• Pressure will grow on governments to prioritise fiscal consolidation from 2022, threatening to undermine growth in weaker economies.