Written by Ana Claudia Alfieri,
One important European Union (EU) objective is to achieve macroeconomic and political stability in its neighbourhood by ‘developing a zone of shared stability, security, and prosperity’ through a set of policies that help to bring candidate, potential candidate, and neighbourhood countries closer to the EU. One of these policies is macro-financial assistance: an instrument the EU uses exceptionally to help countries that ‘play a determining role in regional stability, are of strategic importance for the Union, and are politically, economically and geographically close to the Union’ to overcome acute balance-of-payments crises.
The Macro-Financial Assistance (MFA) instrument was created in 1990 as a way to provide macroeconomic support to countries in Eastern Europe with external financing problems and to facilitate their transition to a market economy. The first beneficiary of this instrument was Hungary, which received a loan of €870 million that year. Between 1990 and 1999, eight countries (that would subsequently join the EU: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Romania and Slovakia) benefited from loans. Hungary received the largest amount (€1 050 million), with Romania (€780 million) and Bulgaria (€750 million) also major beneficiaries.
When a country needs assistance, it makes an official request to the European Commission, which carries out an ex-ante evaluation of the country’s financial needs and writes a proposal for the provision of MFA to that country. The European Parliament and the Council of the European Union take the decision to launch an MFA operation using the ordinary legislative procedure. The operation can take the form of loans or grants; loans are financed by borrowing in the international financial markets, while grants come directly from the EU budget. Grants are given only to countries classified by the World Bank as low or lower-middle income, and which have high poverty rates and debt sustainability problems.
Macro-Financial Assistance can only be an exceptional and temporary measure, and is based on strict political and economic conditions:
- The eligible country must respect effective democratic mechanisms, including a multi-party parliamentary system and the rule of law, and guarantee respect for human rights.
- An MFA operation must be paired with and complement an International Monetary Fund (IMF) adjustment programme, which means a previous agreement on a credit arrangement to alleviate short-term balance of payment difficulties and implement adjustment measures between the eligible country or territory and the IMF has to be in place.
- There is a significant and residual external financing gap over and above the resources provided by the IMF and other multilateral institutions, despite the implementation of strong economic stabilisation and reform programmes by the relevant country or territory.
- The assistance has to be exceptional and complementary to the resources provided by the IMF and other multilateral financial institutions, and there has to be fair burden-sharing between the Union and other donors.
The countries outside the EU that have been granted assistance since 1990 are Albania, Algeria, Armenia, Belarus, Bosnia, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Georgia, Israel, Jordan, Kosovo, the Kyrgyz Republic, Lebanon, Moldova, Montenegro, Serbia and Montenegro, Serbia, Tajikistan, Tunisia and Ukraine.
Read the full publication on ‘Macro-financial assistance’.