The European Investment Stabilisation Function (EISF)

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Wilson King, 89 Belgium

The information and views presented in this article are those of the authors only, and do not reflect the positions and opinions of their former or current employers, or of any organisation they were or are affiliated with.

Executive summary

The European Investment Stabilisation Function (EISF) is a proposed function of the European Union broadly aimed at facilitating recovery among European Monetary Union (EMU) Member States in the aftermath of adverse asymmetric shocks. Financed by common borrowing by the EU, the proposed function would extend zero-interest lines of credit to EMU Member States according to a quasi-automatic rules based mechanism, limiting the influence of political considerations in the allocation of funds by instituting a set of unemployment-based activation “triggers.” This article summarises the principles and substance of the proposed EISF, examining their potential role within the existing institutional frameworks of European economic policy. The state of negotiations is discussed, as are barriers to implementation. Finally, this brief contextualises the EISF within the economic phenomena of the COVID-19 pandemic, summarising academic literature and public debate regarding its potential efficacy at addressing similar crises in the future.

What is the European Investment Stabilisation Function?

Discussions regarding the potential introduction of the EISF initially emerged as a means of addressing the persistent gap between fiscal and monetary policymaking authority of the EU institutions. Since its introduction in 1999 through the Treaty of Amsterdam, the European Central Bank (ECB) has retained principal control over European monetary policymaking. However, no similar institutions have emerged to unilaterally facilitate fiscal policy, which is still largely the purview of the individual Member States [1]. This persistent imbalance has raised serious concerns regarding the EU’s ability to address financial and economic crises. As early proponents of currency areas have noted [2], monetary policy authorities are challenged to harmonise decisions across regions when economic performance is disparate; loosening of policy can alleviate economic downturns in some regions, while exacerbating inflation in others. This persistent imbalance has lent credence to advocates of a “complete” European economic union, characterised by institutions to conduct common fiscal policy alongside the ECB [3] [4].

The EISF is designed in this spirit as a centralised mechanism through which the European Commission can conduct fiscal policy. Proposed to be available to all EU Member States party to the exchange rate mechanism II (ERM II) — a system of exchange rate controls introduced by the European Economic Community in January of 1999 — the function would facilitate recovery from asymmetric shocks through the issuance of zero-interest lines of credit earmarked for fiscal stimulus.

Unlike existing functions such as the European Stability Mechanism (ESM), Next Generation EU, and the Support to Mitigate Unemployment Risks in Emergency (SURE) fund, the EISF would be explicitly designed to encourage uptake and insulate fiscal policymaking from wider political whims. Much of Europe’s unified fiscal policy architecture — especially the ESM — emerged in response to the European Sovereign Debt Crisis as a means of counteracting financial crises by extending liquidity to countries facing balance of payments crises or banks in need of recapitalisation. Hence, drawing upon the ESM is associated with substantial negative stigma and is normally accompanied by stringent structural adjustment requirements. Though Next Generation EU, the EU’s “coronabonds” programme, played a fundamentally similar purpose as the proposed EISF, its implementation has been ridden with political difficulties, particularly regarding the distribution of funds to countries deemed to be in violation of the EU’s rule of law standards [5].

The proposed EISF is meant to circumvent these difficulties through the use of a quasi-automatic allocative structure that distributes funds according to a predetermined “double unemployment trigger.” Specifically, any Member State receiving funding from the EISF would require both a quarterly national unemployment rate exceeding the national average over the previous 60 months and an increase in unemployment of at least one percentage point year-on-year. [6] Crucially, such triggers would ensure that allocation of funds is not directly conditional upon EC approval, reducing the likelihood that the individual concerns of Member States or the EC at large permeate decisions over the distribution of funding. Unlike the ESM, which was established through an intergovernmental treaty, the EISF would also be under the explicit jurisdiction of the EU, thereby incorporating fiscal policy more thoroughly with the mandate of the Union without infringing upon or completely abolishing the mandate of the individual Member States to conduct additional fiscal stimulus themselves.

Much like Next Generation EU, the proposed EISF would be financed by common borrowing on the financial markets, with individual Member States responsible for subsidising interest through annual budgetary contributions. Provided Member States meet debt obligations, it is expected that the EISF would have a net-zero effect on the EU budget; however, minimal financial risk would be jointly carried by the EU Member States.

What is the state of negotiations?

Action on the establishment of the EISF has been slow at the European level, not least as a result of the EC’s strategic reallocation of attention and resources to addressing the economic disruption caused by the COVID-19 pandemic. The following timeline summarises the key events in the proposed function’s history:

February 2017 — Resolution Adopted by the European Parliament (EP) Supporting the Introduction of a Common European Stabilisation Function

On 16 February 2017, the EP issued a resolution directly calling for the introduction of a common European stabilisation function in the spirit of the EISF. Specifically, the resolution states the following:

“The transfer of sovereignty over monetary policy requires alternative adjustment mechanisms such as the implementation of growth-enhancing structural reforms, the single market, the Banking Union, the Capital Markets Union, to create a safer financial sector, and a fiscal capacity to cope with macroeconomic shocks and increase the competitiveness and stability of Member States’ economies, in order to make the euro area an optimal currency area.

Convergence, good governance and conditionality enforced through institutions being held democratically accountable at euro-area and/or national level are key, notably in preventing permanent transfers, moral hazard and unsustainable public risk sharing.

As the magnitude and credibility of the fiscal capacity increase, it will contribute to restoring the trust of the financial market in the sustainability of public finances in the euro area, making it possible, in principle, to better protect taxpayers and reduce public and private risk.

The fiscal capacity shall include the European Stability Mechanism (ESM) and a specific additional budgetary capacity for the euro area. The budgetary capacity shall be created in addition to and without any prejudice to the ESM.”

Though the EP resolution does not directly address the implementation of the EISF, its call for an additional budgetary capacity for the euro area provides an open-ended framework in which future institutional reforms can occur. The resolution hence provided a blueprint on top of which future politicians and bureaucrats could sculpt and frame what a European fiscal union would look like.

June 2018 — Meseberg Declaration Issued

On 19 June 2018, President Emmanuel Macron of France and Chancellor Angela Merkel of Germany issued a joint declaration in favour of a euro area budget with funds earmarked for an unemployment stabilisation fund within the existing framework of the ESM. Specifically, the declaration reads as follows:

“As a first step, we need to change the intergovernmental Treaty of the ESM in order to include a common backstop instrument, enhance the effectiveness of precautionary instruments for Member States and enhance its role in assessing and monitoring future programs. And in a second step, we can then ensure the incorporation of the ESM into EU law, preserving the key features of its governance. Further work should be undertaken on an appropriate framework for liquidity support on resolution. Conditionality remains an underlying principle of the ESM treaty and all ESM instruments but adapted to each instrument.”

While this declaration does reiterate German and French support for a movement towards a common European fiscal policy, it envisions this shift as occurring within existing institutional architecture, specifically via ESM instruments. This institutional preference implies three distinct divergences from the proposed framework of the EISF: (1) a continued reliance on strict conditionalities in the issuance of credit, (2) a preference for traditional goals of economic convergence over stabilisation of asymmetric shocks, and (3) a reliance on intergovernmental treaties to enforce fiscal rules, rather than EU institutions [7].

November 2018 — Draft Report Tabled By the EISF’s Rapporteurs

The legislative dossier advocating for the introduction of the EISF was jointly sponsored by Pervenche Berès (S&D, France) and Reimer Böge (EPP, Germany) across both the Economic and Monetary Affairs and Budget Committees of the EP. The co-rapporteurs issued a draft report recommending the introduction of the EISF in November of 2018, legally justifying the function through the Treaty on the Functioning of the European Union’s (TFEU) mandate to promote convergence and competitiveness across the Member States. In contrast to initial proposals, the draft report suggests that participation in the EISF should be mandatory among Member States, with strategic guidance on EISF initiatives provided by the Eurogroup on an annual basis.

December 2018 Eurogroup Eliminates Stabilisation Function from the Proposed EU Budget

On 14 December 2018, the Eurogroup issued a statement calling for a deepened commitment to European monetary integration; however, funding for the proposed EISF was not directly mentioned and has since been excluded from proposed annual budgets.

The path forward

The COVID-19 pandemic and its economic response fundamentally altered the strategic priorities of the EU on fiscal policy, catalysing the creation of several new mechanisms with which to support Member States facing fiscal stress. Among these are the SURE fund, a €100 billion insurance instrument created to combat unemployment, the €750 billion Next Generation EU recovery instrument, and an additional €240 billion line of credit extended through the ESM. While these programmes have played important roles in counteracting the economic fallout of the pandemic, they have also exposed fundamental flaws in the balkanised fiscal policy infrastructure of the EU. SURE’s disbursement of grants has been relatively slow, the distribution of grants and loans from Next Generation EU has been tied up with concerns over the rule of law in recipient countries [8], and the ESM is generally not drawn upon because of perceptions of stigma. Hence, legitimate arguments exist for efforts to streamline and de-politicize fiscal policy decisions.

At this point in time, however, prospects of introducing the EISF have been less than optimistic. Academic literature has questioned the legitimacy of the EISF’s allocative formulas, suggesting that its current structure may be highly regressive, undermining European cohesion and violating the function’s legal basis in the EU’s convergence criteria [9]. Critics have also pointed to the EISF’s lack of conditionalities as a policy flaw, suggesting that funds may not trickle down to economically depressed regions if national governments distribute funding. Finally, internal opinions by the European Committee of the Regions (COR) have questioned the limited financial leverage of the proposed EISF, arguing that its pool of funding may be wholly inadequate, particularly in cases of international economic crisis such as that brought about by the COVID-19 pandemic [10].

Despite these technical and academic critiques, the largest barrier to implementation for the EISF is political, rather than economic, in nature. Namely, members of the so-called ‘New Hanseatic League’ — a fiscally conservative bloc of EU Member States including Ireland, the Netherlands, and Denmark — have signalled strong opposition to what they termed “mutual bailout funds,” instead preferring a tightening of existing fiscal rules aimed at encouraging balanced budgets across the Member States [11]. In tandem with an increased strategic focus on the economic impacts of the COVID-19 pandemic, this political opposition leaves the future of the proposed EISF highly uncertain.


[1] Johanna Treeck, “It’s time to shake up Europe’s fiscal rules, says Irish central banker,” Politico EU, August 3, 2021, https://www.politico.eu/article/european-fiscal-rules-european-central-bank-ecb-irish-banker/.

[2] Robert Mundell, “A Theory of Optimum Currency Areas,” The American Economic Review 51, no. 4 (1961): 657-665, https://www.jstor.org/stable/1812792.

[3] Helge Berger, Giovanni Dell-Ariccia, & Maurice Obstfeld, “Revisiting the Economic Case for Fiscal Union in the Euro Area,” IMF Economic Review 67 (2019): 657-683, 10.1057/s41308-019-00089-x.

[4] Michael Bordon, Lars Jonung, & Agnieszka Markiewicz, “A Fiscal Union for the Euro: Some Lessons from History,” CESifo Economic Studies 59, no. 3 (2013): 449-488, https://doi.org/10.1093/cesifo/ift001.

[5] Jakob Hanke Vela & Suzanne Lynch, “Commission pushing Poland to accept rule of law milestones in recovery plan, Politico EU, October 1, 2021, https://www.politico.eu/article/poland-rule-of-law-europe-recovery-plan-vera-jourova/.

[6] Christian Scheinert, “European Investment Stabilisation Function: EU Legislation in Progress,” European Parliamentary Research Service.

[7] Shahin Vallée, Jérémie Cohen-Setton, Paul De Grauwe, & Sebastian Dullien, “The proposed reform of the European Stability Mechanism must be postponed,” EUROPP Blog, December 11, 2019, https://blogs.lse.ac.uk/europpblog/2019/12/11/the-proposed-reform-of-the-european-stability-mechanism-must-be-postponed/.

[8] Caroline de la Porte & Mads Dagnis Jensen, “The next generation EU: An analysis of the dimensions of conflict behind the deal,” Social Policy & Administration 55, no. 2 (2021): 388-402, https://doi.org/10.1111/spol.12709.

[9] Bernd Lucke & Bodo R. Neumann, “Bad rules rather than slow discretion? A critical appraisal of EU stabilisation policy,” International Journal of Economic Policy Studies 15 (2021): 367-385, https://doi.org/10.1007/s42495-021-00063-4.

[10] Grégory Claeys & Bruegel, “New EMU stabilisation tool within the MFF will have minimal impact without deeper EU budget reform,” Bruegel, May 9, 2018, https://www.bruegel.org/2018/05/new-emu-stabilisation-tool-within-the-mff-will-have-minimal-impact-without-deeper-eu-budget-reform/.

[11] Magnus Schoeller, “Preventing the eurozone budget: issue replacement and small state influence in EMU,” Journal of European Public Policy 28, no. 11 (2021): 1727-1747, https://doi.org/10.1080/13501763.2020.1795226.

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