Legal developments in the economic and monetary union during the debt crisis: The mechanisms of financial assistance

Common Market Law Review

Volumn 49, Issue 5, 2012, Pages 1613-1646

  de Gregorio Merino, Alberto ^a  

^a NONE

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EID: 84869028829     PISSN: 01650750     EISSN: None     Source Type: Journal    
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References (107)

1. Regulation EU No 1173/2011 of the European Parliament and of the Council of 16 Nov. 2011 on the effective enforcement of budgetary surveillance in the euro area, O.J. 2011, L 306/1.
2. Regulation EU No 1174/2011 of the European Parliament and of the Council of 16 Nov. 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area, O.J. 2011, L 306/8.
3. Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 Nov. 2011 amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, O.J. 2011, L 306/12.
4. Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 Nov. 2011 on the prevention and correction of macroeconomic imbalances, O.J. 2011, L 306/25.
5. Council Regulation (EU) No 1177/2011 of 8 Nov. 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure, O.J. 2011, L 306/33.
6. Council Directive 2011/85/EU of 8 Nov. 2011 on requirements for budgetary frameworks of the Member States, O.J. 2011, L 306/41.
7. See proposal for a Regulation of the European Parliament and of the Council on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area (COM(2011)821 final) and proposal for a Regulation of the European Parliament and of the Council on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area (COM(2011)819 final). The plenary of the European Parliament has adopted on 13 June 2012 its amendments on the two Commission's proposals (see respectively Parliament documents A7-0172/2012 and T7-0242/2012).
8. The euro plus pact has been signed by the euro area Member States, together with Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania.
9. See the text of the euro plus pact as Annex I to the conclusions of the European Council of 24/25 March 2011, doc. EUCO 10/1/11, REV 1.
10. The TSCG was signed on 2 March 2012 in the margins of the European Council.
11. It was signed by all the Member States of the Union bar the Czech Republic and the UK.
12. At the moment of drafting this article it is still subject to the ratification of the signatory parties. See the text of the TSCG at .
13. See e.g. Adamski, "National power games and structural failures in the European macroeconomic governance", 49 CML Rev. (2012), 1319-1364.
14. Such as the suspension of the minimum rating threshold for collateral requirements related to the eurosystem's credit operations for marketable instruments issued or guaranteed by the Greek government and, notably, the ECB's securities market programme on the basis of which it has acquired huge amounts of debt issued by some Member States (see Decision 2010/5 of the ECB of 14 March 2010 establishing a securities market programme, O.J. 2010, L 124/8).
15. See Report of the Commission of 8 Jan. 2010 on Greek Government deficit and debt statistics, COM(2010) 1 final.
16. See .
17. See text of the statement at .
18. See text of the statement of the Heads of State or Government of the euro area of 25 March 2010 at .
19. The text of the two agreements may be found in this link, .
20. Germany was however not party to the loan facility Agreement. The German financial institution "Kredietanstalt für Wiederaufbau", KfW, acted instead as Lender on behalf of Germany, in the "public interest, subject to the instructions of and with the benefit of the guarantee of the Federal Republic of Germany".
21. KfW is a German financial institution of public law, regulated by the German Act of 5 Nov. 1948, whose capital is subscribed jointly by the Federal Republic of Germany and the German Länder.
22. See statement of the Heads of State or Government of the euro area and EU Institutions of 21 July 2011 at .
23. A credit event could have triggered the feared credit default swaps and made it very difficult for the ECB to accept Greek debt as collateral for its liquidity injections to the Greek financial sector.
24. See text of the statement at .
25. COM(2010)2010 final.
26. O.J. 2010, L 189/1.
27. The Commission proposal included however a provision that aimed at permitting the EFSM to grant assistance above the Union budget ceiling (see Art. 3 of the Commission proposal). Loans or credits above the ceiling would have been guaranteed directly by the euro area Member States. During the 9 May 2010 Council this provision disappeared from the text finally adopted.
28. See Council conclusions at document 9602/10 and Decision of the representatives of the governments of the Euro area Member States meeting within the Council of the EU, at document 9614/10.
29. See the text of the framework agreement at .
30. As explained above, the EFSF finances its loans through the issuance of bonds. If EFSF bonds are to have the highest possible rating (AAA) - and this is a financial must -, it is necessary that euro area Member States guaranteeing EFSF bonds also enjoy that highest rating. This is however only the case of a limited number of euro area Member States. Therefore, at its inception the EFSF could only issue bonds with the highest rating up to a proportion that was covered by the AAA Member States (approximately 250 billion euros, or half of the total loans it might grant).
31. See statement of the Heads of State or Government of the euro area and EU Institutions of 21 July 2011 at .
32. See conclusions of the Heads of State or Government of the euro area of 11 March 2011 at .
33. Ireland has a 3 year programme with a total of 85 billion euro, of which the EFSF is scheduled to finance 17.7 billion euro. The remainder is to be financed by a 17.5 billion contribution from Ireland itself, 22.5 billion euro from the IMF, 22.5 billion euro from the EFSM and bilateral loans from the UK (3.8 billion euro), Denmark (0.4 billion euro) and Sweden (0.6 billion euro). Portugal has a programme for 3 years that amounts to 78 billion euro, of which the EFSF finances 26 billion euro. The second programme for Greece amounts to 109 billion euro to be financed by the EFSF and the IMF, with private sector involvement.
34. See conclusions of the European Council of 30 Nov. 2010, doc. No EUCO 25/1/10, REV 1, at .
35. See Annex II to the conclusions of the European Council of 16-17 Nov. 2010, doc. EUCO 30/1/2010 REV 1, at .
36. See Jansen, "The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) - A legal overview", 4 Euredia: Revue Européenne de droit bancaire et financier (2011), 417 et seq.
37. See statement of the Heads of State or Government of the euro area and EU Institutions of 21 July 2011 at , point 8.
38. See the text of the ESM Treaty at .
39. See recital (6) of the preamble to the ESMTreaty andArt. 41(2) of theTreaty.The Board of Governors of the ESM has however the capacity to review and amend the maximum lending capacity of 500 billion euro, in accordance with Art. 10(1) of the ESMTreaty.
40. See statement of the Eurogroup of 30 March 2012 on the increase of the total lending capacity at .
41. These are: the Board of Governors, where ministers of the Contracting Parties are represented, which adopts the most important decisions under the ESM, such as the activation of financial assistance.
42. The Board of Directors, in charge of the day to day management of the ESM.
43. Managing director, who chairs the meetings of the Board of Directors and conducts the current business of the ESM under the direction of the Board of Directors (see Arts. 4 to 7 ESM Treaty).
44. The 700 billion euro capital stock of the ESM is divided into paid-in shares and callable shares. The initial total aggregate value of paid-up shares amounts to 80 billion euro.
45. See Arts. 8 to 11 ESM Treaty.
46. See Art. 4(4) of the ESM Treaty. In accordance with Art. 4(7) of the Treaty, the voting rights of each ESM Member shall be equal to the number of shares allocated to it in the authorized capital stock of the ESM. This flexibility mechanism was incorporated in the ESM Treaty after some negative experiences with the unanimity rule under the EFSF, where the internal political disputes in one Member State - Slovakia - were about to veto the whole EFSF amendment procedure.
47. The preferred creditor status of the ESM has been recognized by the contracting parties in the preamble to the ESMTreaty as a matter of fact (see recital 13 thereof), mirroring to a large extent the practice of the IMF. The IMF claims to have the status of privileged creditor, though the IMF's Articles of Agreement do not confer on it such status, nor is there any principle or general rule in public international law which confers on international organizations the quality of preferred creditors. In the case of the IMF, the status of preferred creditor has been acquired as a matter of fact. Assistance is granted by the IMF to the beneficiary State on the understanding that its credits are senior vis-à-vis any other outstanding credits held against such State. It is in the members' interest to be in good standing with the IMF if they want to be eligible for assistance (see Art. XXVI, section 2(a) of the IMF's Articles of Agreement).
48. See text of the statement of the euro area summit of 29 June 2012 at .
49. Under Art. 15 of the ESM Treaty, which envisages the financial assistance for the recapitalization of financial institutions, such assistance is to be channelled through loans to the ESM Member concerned. This has created huge financial and political problems with Spain, where the recapitalization needs of its financing sector could go up to 100 billion euros. The fact that the recapitalization is operated through loans to Spain could fatally increase its public debt, and hence further deteriorate its financing conditions in the markets. The possibility for the ESM to directly recapitalize financial institutions aims at avoiding this conundrum.This will indeed make of the ESM not only a budgetary fund but also a bank rescue fund. Of course, in the same manner that budgetary assistance is to be accompanied by enhanced surveillance and conditionality over the beneficiary country, banking assistance has to be accompanied by a system of prudential supervision with powers to oversee financial institutions. This is why the statement of 29 June 2012 makes direct recapitalization contingent upon the establishment of a single supervisor for banks in the euro area, through Art. 127(6) TFEU, which enables the Council to confer on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings. All this connects with the report of the president of the European Council "Towards a genuine Economic and Monetary Union", presented during the European Council of 28/29 June 2012, that advises the establishment of an "integrated supervision" and a "European resolution scheme".
50. See text of the report at .
51. The Monetary Committee, working on the preparation of the Treaty of Maastricht, where the no-bailout clause was incorporated, stated in a non-published report of 19 July 1990: "Budgetary discipline is a necessary condition for stable prices and a stable currency. It must therefore be one of the foundation stones of EMU. The Treaty should lay down -(I) that monetary financing must be excluded, (II) that neither the other Member States nor the Community stand behind any Member State's debts, (III) that excessive deficits must be avoided. . .. The Member States will follow budgetary policies which respect the principles of budgetary discipline.. . . these principles include the following. (I) Monetary and compulsory financing of public deficits should be excluded. This implies that government should have no access to central bank financing and that financial institutions should not be obliged to acquire government paper for the purpose of financing the public sector deficit.. . .. (II) Each Member State must bear the responsibility for its own debt management and must ensure that it is in a position to honour its engagements. It must be clear that neither the Community nor the other Member States stand behind a Member State's debts. This 'no bail-out' rule would ensure that the financial markets exercise a degree of discipline on any Member State pursuing unsound budgetary policies, by imposing differential terms on its paper, and ultimately by refusing to lend. (III) Excessive deficits must be avoided, even if there is no monetary financing. This must become a key principle of EMU. They are likely to be associated with an economic policy stance which may jeopardize the stability-oriented monetary policy and reach beyond national frontiers. Theymay force partner countries to alter their policy mix, and monetary authorities to raise interest rates." (emphasis added).
52. See in this sense Ruffert, "The European debt crisis and European Union law", 48 CML Rev. (2011), 1777.
53. Fassbender, "Der europäische 'Stabilisierungsmechanismus' im Lichte von Unionsrecht und deutschem Verfassungsrecht", 13 Neue Zeitschrift für Verwaltungsrecht (2010), 800.
54. Jeck, Van Roosebeke and Vosswinkel, "Keinen euro nach Athen tragen -Warum ein Bail-out Griechenlands ökonomisch und juristisch unzulässig ist", (2012) Centrum für Europaïsche Politik (CEP), 12.
55. Smits, The European Central Bank. Institutional aspects (Kluwer Law International, 1997), p. 77.
56. Bandilla, "Das Recht der EU II, Stand: Januar 2000, Art. 103", edited by Grabitz and Hilf.
57. See in this sense Middleton, "Not bailing out. . . Legal aspects of the 2010 sovereign debt crisis", in A man for allTreaties. Liber amicorum en l'honneur de Jean-Claude Piris (Bruylant, 2011), pp. 421 et seq.
58. Assistance consisting in the purchase of bonds in the primary and secondary markets, as the case may be under the EFSF and the ESM, can be assimilated to loan and credit transactions. Actually, bonds, where the issuing State has the obligation to pay the principal and interests at maturity, may be regarded as securitized loans, to which the above reasoning of compatibility with Art. 125 TFEU would be fully applicable.
59. See judgment of the German Constitutional Court of 12 Oct. 1993 on the ratification of the Treaty of Maastricht by Germany, Cases 2 BvR 2134/92 & 2159/92, English version at [1994] 1 C.M.L.R. 57. The German Constitutional Court stated that "this conception of the currency union as a community based on stability is the basis and subject-matter of the German Act of Accession. If the monetary union should not be able to develop on a continuing basis the stability present at the beginning of the third stage within the meaning of the agreed mandate for stabilization, it would be abandoning the Treaty conception" (point 90 of the judgment).
60. See Annex I of the conclusions of the European Council of 16-17 Dec. 2010, document EUCO 30/1/10, REV1, at .
61. European Council Decision of 25 March 2011 amending Art. 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro, O.J. 2011, L 91/1.
62. Price stability is mentioned in Art. 3(3)(1) TEU, in Arts. 119(2) and (3) and 282(2) TFEU and in Art. 2(1) of the Statute of the ESCB and ECB. In accordance with Art. 127(1) TFEU, the primary objective of the European System of Central Banks (ESCB) shall be to maintain price stability.
63. See Commission Green Paper of 23 Nov. 2011 on the feasibility of introducing Stability Bonds (COM(2011) 818 final).
64. Delpla and Von Weizsäcker, "The blue bond proposal" Bruegel policy brief, 2010/03, May 2010 and "Eurobonds: The blue bond concept and its implications", Bruegel policy contribution, 2011/02, March 2011.
65. Art. 125 TFEU would however remain applicable vis-à-vis those Member States that were not part of the eurobonds scheme and vis-à-vis the tranches of public debt issuance that were still made by the participating Member States.
66. Under Art. 143 the Council may also grant mutual assistance. However such assistance is limited to non-euro area Member States and does not, in principle, cover budgetary solvency problems but situations where the Member State concerned is in difficulties or seriously threatened with difficulties as regards its balance of payments. See also Council Regulation (EC) No 332/2002 establishing a facility providing medium-term financial assistance for Member States' balances of payments, O.J. 2002, L 53/1.
67. See "Intergovernmental conferences, contributions by the Commission, communication of the Commission of 21 August 1990", Bull. EC, 2/91. Interestingly, the 1989 Report on Economic and Monetary Union in the community of the committee for the study of Economic and Monetary Union (also known as the Delors Committee, created by the Hanover European Council of June 1988 to study and propose concrete stages leading towards monetary union) stated the following: ". . . it might be necessary in certain circumstances to provide financing flows through official channels. Such financial support would be additional to what might come from spontaneous capital flows or official borrowing and should be granted on terms that would prompt the recipient to intensify its adjustment efforts" (see p. 19, para 29).
68. See in this sense Pipkörn, "Legal arrangements in the Treaty of Maastricht for the effectiveness of the economic and monetary union", 31 CML Rev., 263.
69. See Louis, "Guest editorial: The no-bail out clause and rescue packages", 47 CML Rev. (2010), 971.
70. See declaration No 6 of the intergovernmental conference of the Treaty of Nice on Art. 100 [122TFEU] according to which "The Conference recalls that decisions regarding financial assistance, such as are provided for in Article 100 [122] and are compatible with the 'no bail-out' rule laid down in Article 103 [125]. . ..".
71. See Council implementing decision 2011/77 of 7 Dec. 2010 on granting Union financial assistance to Ireland (O.J. 2011, L 30/34) and Council implementing decision 2011/344 of 30 May 2011 on granting Union financial assistance to Portugal (O.J. 2011, L 159/88).
72. Under Art. 9 of Regulation 407/2010 the Commission has to elaborate a report on the continuation of the exceptional circumstances that justify the adoption of the Regulation six months after its entry into force and, where appropriate, every six months thereafter.
73. See Art. 4(1) and (2) of the Greek loan facility intercreditor agreement and recital (6) of the preamble to the Greek loan agreement.
74. Art. 2(1) of the EFSF framework Agreement.
75. Art. 13(3) ESM Treaty.
76. See, Art. 134 of the Convention implementing the Schengen agreement of 14 June 1985, according to which "The provisions of this convention shall apply only insofar as they are compatible with Community law".
77. Art. 47 of the Prüm Convention on the stepping up of cross-border cooperation, particularly in combating terrorism, cross-border crime and illegal migration (Council doc. 10900/05), drafted in identical terms.
78. On the relationship of the agreements concluded by Member States inter se and the principle of sincere cooperation, see De Witte, "Old-fashioned flexibility: International agreements between Member States of the European Union", in De Burca and Scott (Eds.), "Constitutional change in the EU: From uniformity to flexibility?" (Hart publishing, 2000), pp. 30 et seq.
79. See also Capdevila, "Son los acuerdos inter se una alternativa a la cooperacion reforzada en la UE? Reflexiones al hilo del Tratado de Prüm", 40 Revista espanola de derecho europeo (2011), 419.
80. E.g. the Court of Justice has considered that conventions for the avoidance of double taxation concluded between Member States must respect the law of the Union, in casu the EC Treaty provisions on the free movement of workers, and that they should be set aside by the national judge in case of conflict (see Case C-385/00, De Groot v. Staatssecretaris van Financiën, [2002] ECR I-11819, para 110).
81. For Greece, see Council decision 2010/320 of 10 May 2010 addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit (O.J. 2010, L 145/6).
82. See Art. 6 of the proposal for a Regulation on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. Recital (2) to the preamble of the proposal motivates this provision by stating that "The full consistency between the Union multilateral surveillance framework established by the Treaty and the possible policy conditions attached to this financial assistance should be enshrined in Union law".
83. See Arts. 2(1)(a) of the EFSF framework agreement and 13(1) of the ESM Treaty.
84. See Arts. 2(1) of the Greek intercreditor agreement, 2(1)(a) of the EFSF framework agreement and 13(3) of the ESM Treaty. In the particular case of the Greek loan agreement, the Commission is also empowered to negotiate and sign the loan facility agreement on behalf of the lenders.
85. See Arts. 4(1) of the Greek intercreditor agreement, 3(1) of the EFSF framework agreement and 13(7) of the ESM Treaty.
86. For the Greek loan facility, see decision of the representatives of the governments of the 27 Member States of 5 May 2010 in Council at document No 9417/10. For the EFSF, see the decision of the representatives of the governments of the 27 Member States at Council document No 9614/10.
87. In this judgment the Court stated that "The. . .Treaty does not prevent the Member States from entrusting the Commission with the task of coordinating a collective action undertaken by them on the basis of an act of their representatives meeting in the Council".
88. See Joined Cases C-181 & 248/91, Parliament v. Council and Commission, [1993] ECR I-3685, para 20.
89. See Arts. 14(2) of the Greek loan and inter-creditors agreement, respectively, and Art. 16(2) of the EFSF framework agreement. In both the Greek facility and the EFSF, the parties have chosen English law as the law that governs the agreements and the non-contractual obligations deriving from it.
90. There are only two precedents where international conventions not based on the EU Treaties have attributed to the Court of Justice jurisdiction to rule on disputes between Member States, without however mentioning expressly Art. 273 TFEU: the Internal Agreement on the measures and procedures required for implementation of the fourthACP-EEC Convention (Art. 6 of O.J. 1991, L 229/301) and the Convention of 19Apr. 1972 setting up a European University Institute (see Art. 29(2) thereof at ).
91. There are other precedents where conventions concluded between Member States have granted to the Court powers of interpretation through preliminary rulings. These conventions stemmed from former Art. 293 TEC - repealed by the Treaty of Lisbon - which required Member States, so far as necessary, to conclude agreements in certain areas linked to the policies of the Treaties, notably the internal market (see e.g. the Convention of 27 Sept. 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, the Brussels Convention and the protocol on the interpretation by the Court of Justice of the Brussels Convention - a consolidated version of the Brussels convention and the protocol may be found at O.J. 1998, C 27/1). Whilst recognizing that they are linked to the law of the Union, the Court of Justice has never questioned the attribution of jurisdiction operated by these conventions (See Case C-398/92, Mund & Fester, [1994] ECR I-467, paras. 11 and 12).
92. See Lenaerts, Arts and Maselis, Procedural law of the European Union (Sweet and Maxwell, 2006), pp. 502 et seq.
93. The procedural aspects of actions based onArt. 273TFEU are laid down in Art. 38(6) of the Rules of procedure of the Court of Justice and other instruments governing the Court (O.J. 1991, L 176/7).
94. See in this sense Lasok, Millet and Howard, Judicial control in the EU: procedures and principles (Richmond, 2004), pp. 114 and 115.
95. See also Art. 24(2) ESMTreaty.
96. Art. 18(1) (b) and (2) of Council Regulation 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities (the Financial Regulation), permits the earmarking of some revenues, among which the proceeds of sanctions under the excessive deficit procedure.
97. BVerfG, BvR 987/10. The complainants, German individuals, contested the two German laws on granting of guarantees for maintaining the solvency of the Hellenic Republic which is required to ensure financial stability in the Monetary union (the Währungsunion-Finanzstabilitätsgesetz of 7 May 2010, BGBl I S. 537) and on granting of guarantees in the context of the EFSF (the Euro-Stabilisierungsmechanismus-Gesetz of 21 May 2010, BGBl I S. 627).
98. See paras. 121 to 124.
99. Our translation from the German original text.
100. Paras. 125, 127 and 128.
101. In our view, this passage of the judgment referring to "permanent" mechanisms of assistance would not rule out permanent institutional frameworks that might provide for financial assistance, if ever activated, such as the ESM, to the extent that the Bundestag maintained a power of control on every specific granting of assistance. This passage excludes rather the creation of schemes of permanent and continued assistance whose budgetary implications for Germany are unspecified and not calculable ex ante.
102. See para 129.
103. Para 137.
104. In its judgment of 30 June 2009 on the Treaty of Lisbon (BVerfG, 2 BvE 2/08, 30 June 2009), the BVerfG ruled at point 256 that "A transfer of the right of the Bundestag to adopt the budget and control its implementation by the government which would violate the principle of democracy and the right to elect the German Bundestag in its essential content would occur if the determination of the type and amount of the levies imposed on the citizen were supranationalized to a considerable extent. The German Bundestag must decide, in an accountable manner vis-à-vis the people, on the total amount of the burdens placed on citizens. The same applies correspondingly to essential state expenditure. . .. Budget sovereignty is where political decisions are planned to combine economic burdens with benefits granted by the state. Therefore the parliamentary debate on the budget, including the extent of public debt, is regarded as a general debate on policy. Not every European or international obligation that has an effect on the budget endangers the viability of the Bundestag as the legislature responsible for approving the budget. The openness to legal and social order and to European integration which the Basic Law calls for, includes an adaptation to parameters laid down and commitments made, which the legislature responsible for approving the budget must include in its own planning as factors which it cannot itself directly influence. What is decisive, however, is that the overall responsibility, with sufficient political discretion regarding revenue and expenditure, can still rest with the German Bundestag".
105. In such a case, a new constitution, in substitution of the current one, would be needed in accordance with Art. 146 GG.
106. See in this sense the interview in the Frankfurter Allgemeine of 25 Sept. 2011 with the president of the BverfG, Voßkuhle, where in connection with the issue of a European economic government he stated that "There is little room left for giving up core powers to the EU. If one wants to go beyond this limit - which might be politically correct and desirable - then Germany must give itself a newconstitution.Areferendumwould be necessary. This cannot be done without the people" (our translation).
107. See the interview at >www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/im-gespraech-andreas-vosskuhle-mehr-europa-laesst-das-grundgesetz-kaum-zu-11369184.html<.