The new treaty to create a European Stability Mechanism (ESM) was signed on 2 February by the eurozone countries' ambassadors in Brussels.

Herman Van Rompuy, President of the European Council, welcomed the signing of the treaty, saying that this permanent crisis mechanism would contribute to raising confidence and ensuring solidarity and financial stability in the euro area.

The ESM will be a Luxembourg-based international financial institution, which will support euro area countries where indispensable to safeguard financial stability. It is scheduled to become operational in July 2012.

The treaty was originally signed in July 2011 but has now been modified to make the ESM more effective.

ESM members

All eurozone member states will become members of the ESM. Non-eurozone member states may also participate in stability support operations.

Financial assistance instruments

The ESM will have a wide range of tools available. It will be able to grant loans to its members, provide precautionary financial assistance, purchase bonds of beneficiary member states on primary and secondary markets and provide loans for recapitalisation of financial institutions.

Voting

Decisions to grant stability support are taken by mutual agreement. However, in situations in which failure to urgently adopt a decision to provide assistance would jeopardise the economic or financial sustainability of the eurozone, decisions may be taken by a qualified majority of 85% of the votes cast.

Transition from the European Financial Stability Facility (EFSF)

Transitional arrangements between the EFSF (the temporary mechanism currently in place) and the ESM will ensure uninterrupted financing of ongoing programmes as needed.

Maximum lending capacity

The adequacy of the ESM's maximum lending volume will be reviewed regularly. The current joint EFSF/ESM lending capacity ceiling, 500 billion euros, will be reassessed by the heads of state or government on 1 March.

Synergy with the fiscal compact

The ESM treaty and the new treaty on stability, coordination and governance in the Economic and Monetary Union (TSCG), also known as the fiscal compact, are "both elements in the strategy to overcome the public debt crisis in the eurozone," stressed Herman Van Rompuy.

From March 2013, any granting of financial assistance under the ESM will be conditional on ratification of the TSCG treaty; and from one year after the entry into force of the TSCG treaty, also on the implementation of a balanced budget rule.

Next steps

The ESM treaty has to be ratified by the eurozone member states. It is expected to enter into force in July 2012, a year earlier than originally planned.