Law and Political Economy of Financial
Markets: evaluating the appropriateness of
creative and innovative interpretations of
European Union law addressing the
European debt crisis
Adam Klamo 12378666E-mail: adam.klamo@student.uva.nl Master track: Law and Finance
Name of supervisor: Professor René Smits Date of submission: 26.07.2019
2
Abstract
The European debt crisis spawned immediate political objectives for the Eurozone Member States, including the preservation of the single currency. While under political pressure, the Court was required to address the negative effects of the crisis, most famously when the legality of responses of the EU institutions and the Member States to the crisis came before it. In these cases, the Court upheld the legality of the European Stability Mechanism and the Outright Monetary Transactions programme, most notably against Articles 123 TFEU and 125 TFEU. This paper studies and evaluates the interpretations of these legal provisions that the Court delivered along with its legal reasoning and the wider implications of its decisions.
3 Contents
1. Introduction ... 4
2. Creative and Innovative Interpretations addressing the European Debt Crisis ... 11
2.1 Case C-370/12 Thomas Pringle v Government of Ireland and Others ... 13
2.1.1 Political, Constitutional and Budgetary Sensitivities of MS ... 14
2.1.2 Law and Legal Reasoning ... 22
2.2 Case C-62/14 Gauweiler and Others v Deutscher Bundestag ... 33
2.2.1 Political, Constitutional and Budgetary Sensitivities of MS ... 34
2.2.2 Law and Legal Reasoning ... 35
3. Conclusion ... 40
4
1. Introduction
Judicial power is a reality of political life in the EU(European Union).1 While the political impact of the ECJ(European Court of Justice) is enormous, in a substantial number of its judgments the Court has engaged, not in a pure legal assessment, but in a creative and innovative interpretation of EU law. As a result, the Court facilitates political goals.2 For instance, the Court has exhibited the autonomy needed to move the scope and intensity of European integration beyond what EU law-makers had intended, 3 most notably in landmark judgments, such as Van Gend en Loos,4 Costa v
ENEL,5 Dassonville,6 and Cassis De Dijon.7 In Van Gend en Loos judgment, the Court increased
1
Alex Stone Sweet, The Judicial Construction of Europe (Oxford University Press 2004), 9; Gerald Conway, The Limits of Legal Reasoning and the European Court of Justice (Cambridge University Press 2012), 1; David Edward, ‘Judicial Activism - Myth or Reality?’ in Angus Campbell and Meropi Voyatzi (eds), Legal Reasoning and Judicial Interpretation of European
Law: Essays in Honour of Lord Mackenzie Stuart (Trenton Publishing 1996), 30.
2
Anthony Arnull, The European Union and its Court of Justice (Oxford University Press 2010), 2; Conway (n 1), 18; Karen Alter, ‘Who are the "masters of the treaty”? European governments and the European court of justice’ (1998) 52 International Organization 121; Federico Mancini and David Keeling, ‘Democracy and the European Court of Justice’ (1994) 57 The Modern Law Review 175; Gareth Davies, ‘Activism relocated. The self-restraint of the European Court of Justice in its national context’ (2012) 19 Journal of European Public Policy 76; Joseph Weiler, ‘The transformation of Europe’ (1991) 100 Yale Law Journal 2403.
3
Thomas Horsley, The Court of Justice of the European Union as an Institutional Actor
(Cambridge University Press 2018), 3; Daniel Kelemen and Susanne Schmidt, ‘Introduction – the European Court of Justice and Legal Integration: Perpetual Momentum?’ (2012) 19 Journal of European Public Policy 1, 1.
4
Case C-26/62 NV Algemene Transport- en Expeditie Onderneming van Gend & Loos v
Netherlands Inland Revenue Administration [1963] ECLI:EU:C:1963:1.
5
5 the number of applicants seeking a legal remedy from the ECJ by introducing the doctrine of direct effect. In Costa v ENEL judgment, the Court proclaimed itself as the supreme court regarding matters of the Union. Dassonville and Cassis de Dijon judgments had seen the Court extend the law of the European Single Market, expanding its own competences.
On the one hand, firstly, the autonomy of the Court to interpret EU law creatively and innovatively grants the ECJ an opportunity to abandon the intentions of the founders of the Treaties and the EU legislature, discarding the nuances built into the EU legal framework to reach political agreements. These nuances may take the form of limitations in regard to the scope and application of legislative provisions. There may be valid reasons for including limitations within the legal framework of the EU that the ECJ judges might be unaware of or not in a suitable position to judge. In the HS2 judgment, the Supreme Court of the United Kingdom warned the ECJ that creative and innovative interpretations of EU law may cause a loss of confidence at the national level, impairment of the judicial dialogue between EU and national courts, and reluctance to agree on new legislation at the European level.8
Secondly, the creative and innovative interpretations of EU law may amount to judicial
policymaking by effectively rewriting the existing legislation. Judicial policymaking conflicts with the principle of separation of powers, which poses a challenge considering the fact that the judges of the ECJ are not democratically accountable. The restrictions required by the doctrine of
separation of powers are essential as decisions of ECJ judges, at whom EU citizens cannot come back by exercising their right to vote, are democratic only while in harmony with the law and fundamental human rights. Each step away from the one true interpretation of relevant legal provisions may be troubling because it is a step away from the language implemented by
6
Case C-8/74 Procureur du Roi v Benoît and Gustave Dassonville [1974] ECLI:EU:C:1974:82.
7
Case C-120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein [1979] ECLI:EU:C:1979:42.
8
R (Buckinghamshire County Council and Others) v Secretary of state for Transport [2014] UKSC 3; 1 WLR 324; 169.
6 democratically accountable bodies. 9 Worth noting here that the developed structures of judicial dialogue within the national and European courts would not be needed, if EU law contained only clear-cut rules that enable judges to easily determine the one true interpretation of the applicable law for each case. In cases before the Court where ambiguity and wide language seem to allow for multiple interpretations, the parties can generally persuasively contest the true interpretation of EU law.10 Despite the indeterminacies of EU law, following Dworkin's one right answer thesis, even in hard cases law is not open-textured. There would be one right interpretation that is for the Court to determine, reconcile with its wider implications and deliver through convincing legal reasoning.11 On the other hand, creative and innovative interpretations of the Court do not necessarily
undermine the national and European legislatures beyond what is appropriate in a legal system centred around the doctrine of judicial review. In the legal framework of the Union, the legislative prerogative does not include the right of infringing the constitutional principles, especially respect for human dignity, human rights, freedom, equality and the rule of law. 12 The ECJ has been authorised to effectively rewrite the existing legislation, if a legal provision violates a higher norm, either by declaring the provision invalid or by interpreting the provision in light of the higher norm. In this way, the Court protects the Treaties and the fundamental values of the Union from the tyranny of democracy, counterbalancing the effects of transient majoritarianism. Therefore, considering the thin line between the need for judicial activism and the need for judicial restraint in judicial review proceedings and the indeterminacies of EU law, the role of the ECJ is difficult.
9
Dieter Grimm, ‘The Democratic Costs of Constitutionalisation: The European Case’ (2015) 21(4) European Law Journal 471; Joseph Weiler, ‘Deciphering the Political and Legal DNA of European Integration’ in Julie Dickson and Pavlos Eleftheriadis (eds), Philosophical Foundations of
European Union Law (Oxford University Press 2013), 154.
10
Gareth Davies, ‘The European Union Legislature as an Agent of the European Court of Justice’ (2016) 54(4) Journal of Common Market Studies 846, 846.
11
Ronald Dworkin, Taking Rights Seriously (Harvard University Press 1987).
12
7 Despite the difficulty of the task that the ECJ was endowed with, the underlying attitude of the vast majority of legal publications about the Court issued to date is one of praise and celebration, saluting the particular involvement of the Court in the process of European integration.13 The optimistic narrative of the Court was facilitated predominantly by national associations of academics and practitioners that form the International Federation of European Law (FIDA). In their capacity of judges and lawyers, FIDA members lend a hand in creating cases that the ECJ can rule on, set up EU law journals and publish articles in legal journals of the MS(Member States) to bring national legal communities up-to-date with EU law.14 The contributions of the FIDA members fostered the rise of an influential body of legal scholars endorsing a shared political vision of ever-closer Union. 15 While scholars originating from countries not included in the European integration plan have written about European integration,16 to this day, a critique of the Court is more often than not muffled or confined to particular judgments or areas of jurisprudence and not directed at the general stance of the ECJ.
Hitherto, none of the leading EU law textbooks or publications in English-language discussing the ECJ deals with the methods of interpretation, the reasoning of the Court or even the application of the EU Treaties to the Court as a legal basis of normative limitation on the exercise of its tasks.17
13Michael Blauberger, ‘The European Court of Justice and its political impact’ (2017) 40(4) West
European Politics 907, 907; Dieter Grimm, Constitutionalism: Past, Present and Future (Oxford University Press 2016), 305; Joseph Weiler, ‘The Court of Justice on Trial’ (1987) 24 Common Market Law Review 555, 555.
14
Karen Alter, The European Courts Political Power (Oxford University Press 2009), 34.
15
Conway (n 1), 52; Shiela Jasanoff, States of Knowledge: The Co-Production of Science and the
Social Order (Routledge 2004).
16
Eric Stein, ‘Lawyers, judges, and the Making of a Transnational Constitution’ (1981) 75(1) American Journal of International Law 1; Hjalte Rasmussen, On Law and Policy in the European
Court of Justice (Martinus Nijhoff, 1986); Joseph Weiler, ‘The Community System: The Dual
Character of Supranationalism’ (1981) 1 Yearbook of European Law 257.
17
8 Enter Adam Klamo, attempting to contribute to crafting a new set of reins and guide the self-willed horse to the stable. As the ECJ is an EU institution under Article 13 TEU, the Court is bound by the EU Treaties as other EU political institutions. The Court acknowledged that the EU is
predicated on the principle of rule of law, requiring that neither the MS nor the EU institutions can evade the examination of compliance of their acts with the Treaties.18 In this context, contrary to the prevailing admiration among literature discussing the Court, reserved posture will be adopted by this paper in an attempt to tackle a significant gap in existing legal scholarship about the limitations that the Treaties impose on the Court. This paper will critique the judgments of the Court addressing the European debt crisis where judges inappropriately engage in creative and innovative interpretations, yet will acknowledge the idiosyncratic features of the EU legal system and the complexities of the duty assigned to the Court under the Treaties.
This research paper does not intend to deliver a normative judgment regarding the creative and innovative interpretations of the Court. Instead, the research aspires to evaluate the appropriateness of the creative and innovative interpretations of the ECJ. In this way, this research paper will answer the research question of whether the Court has restrained its creative and innovative interpretations of EU law to appropriate cases. According to Zoldan, creative and innovative interpretation is appropriate, if the judgment restrains the predisposition of democratic majorities to act out of passion and prejudice, instead of after a reasoned determination.19 While acting within EU law, the Treaties place an obligation to state the reasons for decisions on all MS authorities and the EU institutions issuing legal acts.20 The Charter of Fundamental Rights of the Union connects the obligation of the administration to state reasons for its decisions to the right to good
18
Joined Cases C-402/05 P and C-415/05 P Kadi and Al Barakaat International Foundation v
Council and Commission EU:C:2008:461, para 281; Case 294/83 Parti écologiste “Les Verts” v European Parliament [1989] EU:C:1986:166, para 23; Opinion 2/13 Draft Agreement on
Accession of the EU to the European Convention on Human Rights EU:C:2014:2454, para 163.
19
Evan Zoldan, ‘Targeted Judicial Activism’ (2014) 16 Green Bag 2d, 465.
20
Consolidated version of the Treaty on the Functioning of the European Union [2012] OJ C 326/47, art 296.
9 administration.21 In this way, the requirements of sufficient reasoning established by the Treaties and the Charter represent an antidote to inappropriately creative and innovative interpretations of the Court.
Therefore, to answer the research question, three sub-questions will be laid to rest.22 Firstly, has the ECJ interpreted EU law in a creative and innovative manner in the examined judgments? Secondly, has the Court convincingly reasoned its creative and innovative interpretations of EU law? Thirdly, to what degree has the ECJ engaged with the wider implications of the creative and innovative interpretations? To determine the extent of engagement with the wider implications of its judgments, the regard for the different political, constitutional and budgetary sensitivities of the MS that could influence the departure from the one true interpretation of EU law is studied.23 The method adopted by this paper is limiting, considering that it cuts out the dynamic of continuous interaction between political institutions and the judgments of the Court. Still, this static method has yielded results that the author finds illuminating regarding legal, political and financial matters and their interaction. Thus, controversial interpretations of the Court addressing the European debt crisis are analysed, emphasising merits and faults within its legal reasonings and verifying whether the ECJ has fully considered the implications of the judgments.
The development of EU law is heading towards intricate matters that necessitate EU judges to navigate carefully through the delicate terrain of political, constitutional and budgetary sensitivities of MS. Compromising the existing EU legal framework by a faulty legal reasoning or a disregard for sensitivities of MS would degrade EU law to a mere collection of gutless rules and reduce European integration to a factual interdependence within the EU without a profound sense of a shared European identity.24 The challenge of European integration is to develop a relational space
21
Charter of Fundamental Rights of the European Union [2012] OJ C 326, art 41.
22
Arnull (n 2).
23
Guannar Beck, The Legal Reasoning of the Court of Justice of the EU (Hart Publishing 2012), 2.
24
Loïc Azoulai, ‘“Integration through law” and us’ (2016) 14(2) International Journal of Constitutional Law 449, 459.
10 that goes beyond mere political and economic interdependence. 25 Such a relational space should serve as an environment for the development of a common European identity. Unfortunately, judgments where the Court inappropriately engages in a creative and innovative interpretation of EU law to advance European integration through mere political and economic interdependence further reinforce the contentions of Joseph Weiler, who, based on the technocratic and market-based approach to EU integration, asserts that the spiritual dimension of European integration has been exhausted.26 Therefore, even though this research will lack the glamour of a contextual paper written at a high level of generality, it might eventually help to save the Court from itself.27
25 ibid, 458. 26 Weiler (n 9), 157. 27 Arnull (n 2), 232.
11
2.Creative and Innovative Interpretations addressing the
European Debt Crisis
The European debt crisis that has engulfed the Eurozone has triggered responses that produced, besides tensions between creditor and debtor MS within the Economic and Monetary Union (EMU),28 a significant rearrangement in the organisation and exercise of public power in the EU.29 The responses to the crisis signify an overhaul of the EMU system, including the Single
Supervisory Mechanism and the Single Resolution Mechanism. The extension of the EMU
governance has unlocked the opportunity for the judicialization of the EMU politics in the form of reliance on judgments of the ECJ for addressing questions of public policy and political
controversies.30 A number of these judgments have interpreted the existing EU legal framework in a creative and innovative way, transforming the EMU from both an institutional and constitutional standpoint. In fact, the Court might have never displayed more creativity and innovative thinking in its judgments than it did during the European debt crisis.
28
Kenneth Dyson, States, Debt, and Power: 'Saints' and 'Sinners' in European History and
Integration (Oxford University Press 2018).
29
Herwig Hofmann, ‘Controlling the Powers of the ECB: delegation, discretion, reasoning and care What Gauweiler, Weiss and others can teach us’ (2018) ADEMU Working Paper 2018/107, 26 < http://ademu-project.eu/working-papers-2/> accessed 20 January 2019; Pablo Martin Rodriguez, ‘A missing piece of European emergency law: legal certainty and individuals'
expectations in the EU response to the crisis’ (2016) 12(2) European Constitutional Law Review 265, 265.
30
Sabine Saurugger and Fabien Terpan, ‘The Court of Justice of the EU, conflicts of sovereignty and the EMU crisis’ (2018) EMU Choices Working Paper Series, 4; Ran Hirschl, ‘The
Judicialization of Mega-Politics and the Rise of Political Courts’ (2008) 11 Annual Review of Political Sciences 93, 93.
12 The scope of this paper is limited to Pringle and Gauweiler judgments as these decisions amount to the two most significant responses of the Court to the European debt crisis. 31 In the examined judgments, the Court delivered creative and innovative interpretations of Articles 123 and 125 TFEU, upholding the legality of instruments tackling the negative effects of the crisis. Articles 125 and 123 TFEU, referred to as the ‘no-bailout clause’ and the prohibition on monetary funding, were considered to create disincentives for the MS to run excessive deficits and state debt, prevent overspending and lending in good times and protect the taxpayers of the fiscally responsible MS. The analysis contained within this paper is restricted to the interpretations of these two Treaty provisions.
31
Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012]
ECLI:EU:C:2014:2039; Case C-62/14 Gauweiler and Others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400.
13
2.1 Case C-370/12 Thomas Pringle v Government of Ireland and
Others
In the Pringle judgment, the Court upheld the legality of the European Stability Mechanism (ESM), established outside the EU legal order by an intergovernmental treaty.32 This treaty established a permanent rescue mechanism aimed at safeguarding the financial stability of the Eurozone. The ESM was formed at the height of the European debt crisis to lend a hand to the MS that had lost or were about to lose, access to financial markets. The permanent rescue mechanism was preceded by a temporary European Financial Stability Mechanism (EFSM), set up under Article 122(2) TFEU, and a temporary bailout fund, the European Financial Stability Facility (EFSF), a special purpose vehicle set up under the national law of Luxembourg. The aim of the ESM Treaty was to decrease instability in the Eurozone by making financial assistance available to the Eurozone MS. The ESM was empowered to grant loans to the Eurozone MS for a maximum amount of €500 billion,33
while the remaining €200 billion of the fund is safely invested to guarantee the issuance of ESM bonds that will always receive AAA credit rating with the lowest possible interest rate at the current time. The signatories to the Treaty establishing the ESM later decided to further raise the maximum lending capacity of the ESM to €700 billion.34
The ESM financial assistance may also come into being as loan disbursements,35 precautionary facilities,36 facilities to finance the recapitalisation of banks,37 facilities for the purchase of bonds in the
32
Treaty establishing the European Stability Mechanism, 2 February 2012,
<http://www.europeancouncil.europa.eu/media/582311/05-tesm2.en12.pdf> accessed 5 February 2019.
33
ibid, recital 6 and art 39.
34
Statement of the Eurogroup (30 Mar. 2012)
<https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/129381.pdf> accessed 14 April 2019.
35
ESM Treaty (n 30), art 16.
36
ibid, art 14.
37
14 secondary markets,38 and facilities for the purchase of bonds in the primary markets.39 The
financial assistance from the ESM is subject to strict conditionality, ensuring that the fiscal policy and other economic policies of the MS are consistent with the requirements under the EU legal framework.
2.1.1 Political, Constitutional and Budgetary Sensitivities of MS
The biggest challenge to the ever-closer EU today is to develop a shared sense of European identity, a sense of community and homogeneity among European citizens.40 Considering that Western countries have extensive experience with the coexistence of a variety of identities, in my view, the chances of fortifying European identity are encouraging. Nonetheless, bearing in mind the variety of nations and traditions encompassed within the Union, it might be a fantasy that a common European identity will ever replace the diverse national identities. One of the many obstacles hindering the development of a shared European identity is that the regulation of national fiscal policies at the Union level generates enmity among European citizens towards the EU
institutions.41 In this regard, the European debt crisis presented the EU and the MS with a significant opportunity that could have ultimately facilitated the development of a common European identity among European citizens through a reform of the EMU.
38 ibid, art 18. 39 ibid, art 17. 40
Azoulai (n 24), 458; Alberto Martinelli, ‘The European Identity’ (2017) 2 Journal of Culture Politics and Innovation 1; Magdalena Góra and Zdzisław Mach (eds), Collective Identity and
Democracy The Impact of EU Enlargement (European Commission 2010); Jeffrey Checkel and
Peter Joachim, European Identity (Cambridge University Press 2009); Anne-Dörte Balks, ‘Studying European Identity’ (2013) 12(2) European Political Science 254.
41
Tomasz Woźniakowski, ‘Why the sovereign debt crisis could lead to a federal fiscal union: the paradoxical origins of fiscalization in the United States and insights for the European Union’ (2018) 25(4) Journal of European Public Policy 630, 643.
15 This paper puts forward that the ideal response to the European debt crisis would have been to integrate elements of a common fiscal policy into the EMU and in this way achieve greater fiscal integration.42 The reason for that is, firstly, that the notion of European fiscal authority may highlight the advantages of the Union even to ordinary European citizens. One element of a common fiscal policy would be a tax, financial transaction tax for instance, that could be only effectively levied at the Union level and would not subject the regular European citizens to an increase of tax burden. What's more, levying a tax at the Union level may reduce the tax burden of European citizens, if the EU could collect an adequate amount of revenue and then make use of it to cover the current expenses of the MS, such as unemployment fund or common defence.43 Secondly, if the EMU adopted fiscal elements present in other significant currency areas, for instance, the United States, the Eurozone MS would tackle potential economic and financial shocks together and shield against fiscal risk. The reason for that is that sharing certain fiscal elements bring about automatic risk-sharing mechanisms that are arguably the most efficient method of shielding against business cycle risks as the insurance provided by private markets may not suffice and a sustainable government deficit spending requires a manageable level of public debt.
The characteristic feature of the EMU, the separation of Europeanised monetary policy from national fiscal and economic policy, causes a diagonal conflict that signifies the reluctance of the MS to surrender fiscal authority to the EU.44 Article 3(1) TFEU has granted an exclusive
competence to the EU regarding monetary policy.45 As the conferral of exclusive competence in
42
Helge Berger, Giovanni Giovanni Dell'Ariccia and Maurice Obstfeld, ‘The Euro Area Needs a Fiscal Union’ (IMF Blog, 21 February 2018) < https://blogs.imf.org/2018/02/21/the-euro-area-needs-a-fiscal-union> accessed 05 June 2019.
43
Woźniakowski (n 41), 644.
44
Gunther Teubner, Constitutional Fragments: Societal Constitutionalism in Globalization (Oxford Univerity Press 2014), 158; Chritian Joerges, ‘Europe’s Economic Constitution in Crisis and the Emergence of a New Constitutional Constellation’ (2012) 15(5) German Law Journal 985, 995.
45
16 the policy area of monetary policy does not contain the authority regarding economic policy, the carrying out of such a policy by the MS might obstruct the operation of monetary policy
administered by the European Central Bank (ECB). The friction among monetary and economic policy within the Union does not bear a resemblance to a vertical conflict that could be resolved by the supremacy principle contained within the EU legal framework. Instead, this phenomenon resembles a diagonal conflict as both the EU and the MS hold a great interest in their economies, yet the authority necessary to bring about the proper functioning of the economy is attributed to two separate levels of governance with repeatedly conflicting policy preferences.46
While incorporating fiscal elements in the EMU is politically difficult, the political and economic challenges that the Eurozone was facing during the European debt crisis called for reform. In the years following the Pringle judgment, the EU institutions have attained certain authority to
regulate national fiscal policies, but no fiscal authority by itself. The lack of fiscal elements present within the EMU results in several complications. Firstly, the Eurozone MS are exposed to
economic or financial shocks, particularly the MS that maintain a dangerous amount of public debt as recurrent borrowing generally results in increasing debt, increasing costs of debt, and the
ensuing default. Secondly, the EMU legal framework provided for no instruments that could be used in the event of a crisis.47 The Maastricht Treaty entertained neither the prospect of ousting a fiscally irresponsible MS from the Eurozone nor a bail-out procedure for a MS in financial distress.48 Also, the Stability and Growth Pact, based on Articles 121 and 126 TFEU,49 the
46
Joerges (n 44), 995.
47
Carlos Closa and Aleksandra Maatsch, 'In a Spirit of Solidarity? Justifying the European Financial Stability Facility (EFSF) in National Parliamentary Debates' (2014) 52(4) Journal of Common Market Studies 826, 828.
48
Phoebus Athanassiou, ‘Withdrawal and expulsion from the EU and EMU: Some Reflections’ (2009) Legal Working Paper Series, 10 < https://ssrn.com/abstract=1517760.1> accessed 05 June 2019.
49
17 Excessive deficit procedure, annexed to the Treaty,50 and the specific economic policy
guidelines,51 merely envisaged the necessity for deterrent measures and peer pressure.52 The reason for that is that the EMU had been grounded on the assumption that the pressure to preserve
budgetary discipline applied by the markets and peers within the Eurozone would be adequate.53 Instead of dealing with the systemic deficiencies of the EMU that were uncovered by the crisis, the Eurozone MS addressed the consequences of the crisis and preserved the fragile structure of the currency union. Pressured by the market, the constraints of the EU decision-making and the limitations of the EMU, the MS initially responded to the crisis by taking national measures, for instance, bank guarantees, but later under further pressure from the knock-on effects upon the European financial market, the MS formed a mutual response to the crisis.54 An intergovernmental treaty established a permanent bail-out fund, the European Stability Mechanism (ESM),55 preceded by the European Financial Stability Facility and the European Financial Stabilisation Mechanism.56 The choice of the instrument establishing the ESM has severe consequences. The ECJ held in
Ledra Advertising that ‘whilst the MS do not implement EU law in the context of the ESM
50
Protocols to Consolidated version of the Treaty on European Union [2008] OJ C 115/279, no 12.
51
TFEU (n 20), art 136.
52
Kenneth Dyson, ‘EMU as Europeanization: Convergence, Diversity and Contingency’ (2000) 38(4) Journal of Common Market Studies 645; Mathieu Segers and Femke Van Esch, ‘Behind the Veil of Budgetary Discipline: The Political Logic of the Budgetary Rules in the EMU and the SGP’ (2007) 45 Journal of Common Market Studies 1089, 1090.
53
Willem Buiter, Giancarlo Corsetti and Nouriel Roubini, ‘Excessive deficits: sense and nonsense in the Treaty of Maastricht’(1993) 8(16) Economic Policy 57, 58.
54
Michelle Everson, ‘An Exercise in Legal Honesty: Rewriting the Court of Justice and the Bundesverfassungsgericht' (2015) 21 European Law Journal 474, 481.
55
ESM Treaty (n 32).
56
Council Regulation 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L 118/195; Consolidated version of the ESFS Framework Agreement, 6 July 2010, <https://www.esm.europa.eu/content/efsf-framework-agreement> accessed 11 July 2019.
18 Treaty,… the Charter is not addressed to them in that context’.57 Therefore, as a result of the ESM falling outside of EU law, a permanent stability mechanism that influences EU citizens is subject to neither general principles of EU law, the Charter nor audited by the EU Court of Auditors.
Although the ESM is formally concerned with merely delivering financial assistance to particular MS, the underlying goal of the agreement was maintaining the stability of the EMU.58 Contrary to the formation of the ESM, the European Treaties intended for matters relating to the EMU and the effective functioning of the Eurozone to fall within EU law. Firstly, Article 3(4) TEU assigns the EU with establishing an economic and monetary union with the euro as its currency.59 Secondly, although the authority of economic policy is shared between the MS and the EU, economic policies of the MS must intend to achieve the objectives of the EU.60 In that regard, Article 5(1) TFEU obliges the MS to coordinate their economic policy instruments within the Union.61 Furthermore, Article 119 TFEU clarifies that the adoption of economic policy instruments must be based on close coordination between the MS and the EU.62 Lastly, Article 136(1) TFEU grants the EU the authority to adopt measures specific to a particular Eurozone MS to guarantee the functioning of the EMU.63 Thus, considering the intrinsic position of the EMU within the Treaties, it is
conceptually incoherent for an agreement that is closely related to the maintenance of the EMU to
57
Joined Cases C-8/15 P to C-10/15 P Ledra Advertising and Others v Commission and ECB [2016] ECLI:EU:C:2016:701, para 67; Pringle (n 31), para 178.
58
Pringle (n 31), para. 136; ESM Treaty (n 32), art 3.
59
TEU (n 12), art 3(4).
60
TFEU (n 20), art 120; ibid.
61 TFEU (n 20), art 5(1). 62 ibid, art 119. 63 ibid, art 136(1).
19 be formed and to be operated outside the EU legal framework.64 Establishing the ESM outside of the EU legal framework undermines the normative consistency of the EU legal order.
The European Parliament had similar concerns when expressing dissatisfaction with the fact that the European Council had not considered every possibility within the Treaties for instituting a permanent stability mechanism within the EU legal framework.65 Considering the current EU powers regarding the EMU, enshrined in Article 3(4) TEU, and monetary policy for Eurozone MS, described in Article 3(1)(c) TFEU, the Parliament believed that the Council should have utilised its authority under Article 136 TFEU or under Article 352 TFEU in conjunction with Articles 133 and 136 TFEU to set up a stability mechanism within the EU legal framework. The European Central Bank was also in favour of establishing a stability mechanism within, rather than outside, the EU legal framework.66 The Union method endorsed by the ECB and the European Parliament would
64
Jonathan Tomkin, ‘Contradiction, circumvention and conceptual gymnastics: the impact of the adoption of the ESM Treaty on the State of European Democracy’ (2013) 14 German Law Journal 169, 184.
65
Decision 2011/199/EU of the European Council of 25 March 2011 Amending Article 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 [2011] OJ L 91/1, para 9.
66
Opinion of the European Central Bank of 17 March 2011 on a draft European Council Decision amending Article 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 [2011] OJ C 140, para 8; Worth noting here that the ECB also suggests in paragraph 5 that the amendment of the Treaties, the addition of Article 136(3) TFEU, affects the scope of Article 125 TFEU with respect to
safeguarding the financial stability of the Eurozone. The new Article 136(3) TFEU may generally affect the scope Article 125 TFEU, but the Treaty amendment should not in any capacity affect the interpretation of the article in Pringle due to the fact that judgment was handed down on 27
November 2012, while the decision amending the Treaties entered into force only on 1 January 2013.
20 have enabled the inclusion of legislative and judicial safeguards central to the EMU that were omitted by establishing the ESM outside of the EU legal order.67
Regarding the constitutional and budgetary sensitivities of the MS, the conclusion of the ESM Treaty produced a solidarity mechanism that protects the Eurozone, but at a high cost for the MS to bear.68 The ESM is an instrument by which the Eurozone MS pool their resources to ensure that all the MS, even the MS in financial distress, retain the liquidity to meet their debt payments.
Following Article 8(4) of the ESM Treaty, the signatories to the treaty agree to contribute to the ESM capital.69 Generally, the ESM Treaty expects that decisions relating to lending from the fund are jointly approved by the 19 signatories. Thus, even countries with relatively small contributions to the ESM, for instance, Estonia, could normally put a stop to payments from the fund.70
Article 4(4) of the ESM Treaty, which provides that ‘an emergency voting procedure shall be used where the Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance… would threaten the economic and financial sustainability of the euro area’, prevents small contributors to the fund to veto payments from the fund in
emergencies. 71 The reason for this is that ‘the adoption of a decision by… the emergency procedure requires a qualified majority of 85% of the votes cast’.72 The signatories to the ESM
67
Tomkin (n 64), 185.
68
Maurice Adams, Federico Fabbrini and Pierre Larouche, The Constitutionalization of European
Budgetary Constraints (Hart Publishing 2014), 3; Hannes Hofmeister, ‘To Bail Out Or Not to Bail
Out — Legal Aspects of the Greek Crisis’ (2011) 13 Cambridge Yearbook of European Legal Studies 113, 114.
69
ESM Treaty (n 32), art 8(4).
70
Carri Ginter, ‘Constitutionality of the European Stability Mechanism in Estonia: Applying Proportionality to Sovereignty’ (2013) 9(2) European Constitutional Law Review 335, 337.
71
ESM Treaty (n 32), art 4(4).
72
21 Treaty can cast votes determined by their share of the total contribution to the ESM capital. 73 Therefore, while the ESM Treaty subjects its signatories to the risk of assumption of large financial obligations, small contributors risk having to pay a big part of their GDP without the ability to effectively influence the decisions relating to lending out of the fund in emergencies. For instance, Estonia is assuming the risk of having to pay €1.302 billion, which was 17.5% of its GDP in 2012,74 without holding the right to veto payments in emergencies.75
The lack of the veto power of the small contributors present in the emergency voting procedure undermines the budgetary competences of national parliaments that dwells inside the national constitutions throughout the MS. In this way, the emergency voting procedure is also undemocratic because EU citizens have authorised their respective national parliaments, through national
elections, to make budgetary decisions themselves. By passing the annual state budgets, national parliaments exercise, in the best interests of EU citizens, the budgetary competences of the MS. The treaty exposes the signatories to large risks that require them to assume a significant financial burden, which impacts the budgetary powers of national parliaments and the constitutional rights of many EU citizens. As long as Article 4(4) of the ESM Treaty remains in force, nationals of small contributors to the ESM fund cannot effectively express their political will, by electing national parliaments, regarding the expenditure of their respective MS budget. Therefore, this paper posits that Article 4(4) of the ESM Treaty is undemocratic and inconsistent with
constitutions of many signatories as the emergency voting procedure undermines core
constitutional principles, such as the principle of parliamentary democracy and the principle of parliamentary control over public finances.
These constitutional and budgetary sensitivities signify the political unwillingness to incorporate fiscal elements into the EMU. Even though the contributions of the signatories may be relatively equal, only the signatories that contribute more than 15% of the ESM capital have preserved their
73
ibid, art 4(7).
74
‘Estonia’ (The World Bank) <www.data.worldbank.org/country/estonia > accessed 6 June 2019
75
22 fiscal competences fully. While signatories contributing less than 15% of the ESM capital have effectively conceded significant fiscal elements to the ESM under the emergency voting procedure, Germany, France, and Italy have preserved their fiscal competences under the intergovernmental treaty. These MS are granted veto power as they each fund more than 15% of the ESM capital. The strong political alliance and the relative size of their economies allowed Germany, France, and Italy to preserve the euro without losing any fiscal authority. Seeing that the ESM Treaty is so closely related to the maintenance of a central part of the EU, the incompatibility of the
intergovernmental agreement with the principle of equality among the MS, a core value of the EU constitutional identity, according to Article 2 TFEU in conjunction with Article 4(2) TFEU, is alarming. Although all the signatories ratified the ESM Treaty, the outcome points towards an unequal distribution of political power in the treaty's conclusion. To protect the Treaties and the fundamental values of the EU from the transient majoritarianism, the Court should have considered these constitutional and budgetary sensitivities, along with the examined political difficulties, stemming from the conclusion of the ESM Treaty, as regards the legality of the treaty.
2.1.2 Law and Legal Reasoning
To safeguard a responsible budgetary administration by the MS, a legal provision prohibiting the MS and the EU to assume a debt of another MS was incorporated in the Treaties in the form of Article 125 TFEU. 76 According to Article 125 TFEU, ‘a Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project’.77
Even though the legal scholarship, in the pre-crisis period, scarcely addressed Article 125 TFEU considering its extensive political significance, formerly Article 103 of the Treaty establishing the European Community, the legal provision has been labelled as a ‘no-bailout clause’ and interpreted to mean that no
76
TFEU (n 20), art 125.
77
23 mutual financial assistance among Eurozone governments is to be allowed except for specifically limited projects.78
The prohibitory character of Article 125 TFEU should be revealed through the wording of the legal provision and the situations it covers. Firstly, the addressees of Article 125 TFEU ‘shall not’
engage in the said conduct, which hints at an obligation and thus a prohibition.79 Next, according to Article 125(2) TFEU the Council may ‘specify definitions for the application of the prohibitions referred to in… this Article’. Even more striking, the prohibitory nature of Article 125 TFEU may also be inferred from the choice of the legislator to exclude ‘mutual financial guarantees for the joint execution of a specific project’ from the provision. If the purpose of Article 125 TFEU is to only provide clarification or exemption, the exemption of mutual guarantees would be superfluous because even without the legal provision it would be obvious that the MS are liable for their guarantees.80 The exclusion of mutual guarantees from the legal provision only makes sense in the context of a prohibition.
Secondly, obligations completed by a MS to repay its government bonds obliges that MS to make payments toward its government bonds, but not the other MS. Unlike the Commission reasoned in
78
Closa and Maatsch (n 47), 826; Clause Ortiz, ‘The Political De-determination of Legal Rules and the Contested Meaning of the ‘No Bailout’’ (2017) 26(2) Social and Legal Studies 249, 250; Boris Ryvkin, ‘Saving the Euro: Tensions with European Treaty Law in the European Union’s Efforts to Protect the Common Currency’ (2012) 45 Cornell International Law Journal 227, 242; Rainer Palmstorfer, ‘To Bail Out or not to Bail Out?. The current framework of financial assistance for Euro Area Member States measured against the requirements of EU Primary Law’ (2012) 37(6) European Law Review 771, 775; Matthias Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1777, 1785; Hermann Blanke, ‘The European Economic and Monetary Union — Between Vulnerability and Reform’ (2011) 1 International Journal of Public Law and Policy 402, 417.
79
Palmstorfer (n 78), 775.
80
24 its written observations, asserting that the phrasing ‘shall not be liable for’ signifies ‘a reminder of the fact that a State is part of the Union is not an implicit guarantee for the lenders’,81
an obligation completed by a particular MS only obliges that MS to fulfil the obligation. Reading Article 125 TFEU as providing a clarification that the MS are not liable for or do not assume the obligations of the other MS would render the legal provision redundant because under the general contract law principle of pacta tertiis nec nocent nec prosunt, a sovereign debt contract only binds the parties to the contract. 82 A sovereign debt contract cannot generate obligations for a third party without its consent. Also, the EU legal framework does not provide any provision that might be interpreted as meaning that the EU and the MS are required to offer financial assistance to other MS.
Article 125 TFEU was intended to function as a disciplinary legal provision to achieve fiscal discipline by treating the MS as private investors and exposing the MS to the similar market conditions that any other prospective private investors would experience.83 According to Tomkin, the addition of the no-bailout clause in the Maastricht Treaty was meant to deliver a warning sign to the market that the EU and the MS will not cover for debts of fiscally irresponsible MS.84 The worse an economic policy of a MS, the greater the debt, and thus the higher the risk of sovereign default and when the risk of default is high, borrowing becomes more costly and debt turns out to be more expensive. Thus, the MS adopting a sound budgetary strategy will decrease the interest rates against which they borrow, while the fiscally irresponsible MS will be exposed to prohibitive costs of lending or even shunned by lenders. Because of the market forces, the MS were expected to attempt to keep their public deficit to a minimum to prevent the increase in credit costs, being aware that both the EU and the other MS may not come to its rescue due to the prohibition encompassed in Article 125 TFEU.
81
Pringle (n 31), Written Observations submitted by the European Commission, para 65.
82 Palmstorfer (n 78), 775. 83 Hofmeister (n 68), 121. 84 Tomkin (n 64), 181.
25 The disciplinary effect of a prohibition on bailouts is effective only if no potential prospect of the bailout is present. If the default of a MS is not realistic, the risk of default will not be valued appropriately. Market believing that the Eurozone MS will be bailed out in financial distress will value the bonds correspondingly and generate moral hazard as investors in government bond markets are free to disregard the risk of default that would prevent fiscally irresponsible governments from issuing excessive debt.As borrowing will be less expensive than it should, Eurozone MS will pile up debt, instead of taking the difficult and politically unpopular decisions required by sound budgetary policy. The effectiveness of a bailout prohibition is precluded if the financial market perceives the Eurozone as a joint liability group.85 Unfortunately, the credibility of the prohibition encompassed in Article 125 TFEU was questioned right from its entry into force, exacerbating the extensive effects of the European debt crisis.
A strict reading of Article 125 TFEU is normatively justified by the existence of an exception to the no bail-out clause encompassed in Article 122(2) TFEU. According to Article 122(2) TFEU, ‘where a Member State is… seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned’.86
According to Crawford, taking into consideration that ‘natural disasters’ and
‘exceptional occurrences’ are brought up in the same manner, Article 122(2) TFEU must comprise only of situations in which the difficulties have not been caused by the particular MS itself.87 This conclusion is emphasised by the description of required events as ‘beyond its control’, suggesting that the MS could not prevent them in advance, either because the events were unforeseeable or unavoidable. In both instances, an objective standard must be employed in the inquiry into whether a sensible government have been able to avoid the events and the difficulties instigated by them
85
Jörn Pipkorn, Legal arrangements in the Treaty of Maastricht for the effectiveness of the economic and monetary union (1994) 31 Common Market Law Review 275, 276.
86
TFEU (n 20), art 122(2).
87
Malcolm Crawford, One Money for Europe? The Economics and Politics of Maastricht (Palgrave Macmillan 1993), 143.
26
ante.88 While the global financial crisis would fall under ‘exceptional occurrences’ described in Article 122(2) TFEU, the financial assistance would have been precluded by negligence, for instance, fiscal irresponsibility, on the part of the respective government.
The financial assistance of Article 122(2) TFEU should be resorted to only if the crisis is the single or no less than a significant reason of financial distress of the particular MS. If the crisis amounted to just the last straw to break the camel’s back, the requirements for the financial assistance
described in Article 122(2) TFEU would not be met.89 In view of the diverse economies of the MS, the requirements of the financial assistance described in Article 122(2) TFEU must be evaluated on a case-by-case basis.90 On the one hand, the financial distress of Greece and Portugal demonstrated precisely the fiscal irresponsibility that Article 125 TFEU attempted to counteract as the debts that their respective governments piled up over time prevented them refinancing their debts on the financial market. Consequently, Greece would be precluded from receiving financial assistance by the Treaties, while Portugal might have a claim to the financial assistance as, according to De Santis, Portugal suffered from the contagion effect generated by Greece.91 On the other hand, Ireland and Spain faced financial distress because of the crisis, although they both maintained fiscal discipline.92 As the financial problems in both Ireland and Spain were not produced by negligence, these Eurozone MS would have been able to benefit from the financial assistance referred to in Article 122(2) TFEU.
88 Palmstorfer (n 68), 780. 89 ibid, 781. 90
Barry Eichengreen, ‘The Euro’s Never-Ending Crisis’ (2011) 110 Current History 91, 91.
91
Roberto de Santis, ‘The Euro Area Sovereign Debt Crisis: Sovereign Debt Crisis, Safe Haven, Credit Rating Agencies and the Spread of the Fever from Greece, Ireland and Portugal’ (2012) European Central Bank Working Paper Series 1419
<https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1419.pdf > accessed 2 June 2019, 3.
92
Richard Baldwin and Charles Wyplosz, The Economics of European Integration (McGraw-Hill 2012), 537; Andrade Sousa and Adelaide Duarte, ‘The Fundamentals of the Portuguese Crisis’ (2012) 59 Panoeconomicus 195, 196.
27 Bearing in mind the fact that the MS hold the respective fiscal authority, it seems to me that in the context of the crisis, conceptually, Article 125 TFEU must prohibit all financial assistance from the EU and the MS to financially distressed MS and Article 122(2) TFEU must constitute an exception to the bail-out prohibition that applies only to fiscally responsible MS. The ECJ thought differently and upheld the legality of the ESM, basing its reasoning on arguments grounded in legal formalism and the aim of the prohibition. Concerning arguments based on legal formalism, some of the most influential EU law scholars, such as Paul Craig, raised doubts whether the legal formalism of the
Pringle judgement has not concealed the true economic nature of the ESM as a mechanism of
cross-subsidisation among MS.93 The Court interpreted Article 125 TFEU as not prohibiting ‘either the Union or the MS from granting any form of financial assistance whatever to another MS’ “to the effect that neither the Union nor a MS are to ‘be liable for… the commitments’ of another MS or ‘assume [those commitments]’”.94
The Court arrived at this interpretation of Article 125 TFEU on account of two arguments that, in my view, turn the Treaty provisions relating to economic policy on its head. Firstly, the Court reasoned that ‘if Article 125 TFEU prohibited any financial assistance whatever by the Union or the MS to another MS, Article 122 TFEU would have had to state that it derogated from Article 125 TFEU’.95
Secondly, the Court deduced that as Article 123 TFEU, the prohibition of monetary financing, ‘employs wording which is stricter than that used in… Article 125 TFEU’, ‘Article 125 TFEU is not intended to prohibit any financial assistance whatever to a MS’.96 In my view, the very reason Article 123 TFEU employs stricter wording than Article 125 TFEU is because the latter does not prohibit ‘any financial assistance whatever to a MS’. Article 125 TFEU prohibits financial assistance to MS that are in financial distress because of their own negligence,
93
Paul Craig, ‘Pringle: Legal Reasoning, Text, Purpose and Teleology’ (2013) 20 Maastricht Journal of European and Comparative Law 1, 9; Gunnar Beck, ‘Judicial Activism in the Court of Justice of the EU’ (2018) 36 University of Queensland Law Journal 333, 347.
94 Pringle (n 31), para 130. 95 ibid, para 131. 96 ibid, para 132.
28 particularly fiscal irresponsibility. It also seems to me that the less strict wording of the prohibition serves as an alternative to expressly stating that the financial assistance encompassed in Article 122 TFEU derogates from Article 125 TFEU.
After concluding that the wording of Article 125 TFEU does not prohibit ‘any financial assistance whatever to a MS’, the legal reasoning in Pringle, in my view, erroneously suggests that the
phrasing of Article 125 TFEU, ‘shall not be liable or assume’ necessitates that a principal borrower is released from its debtor position. Because the principal borrower ‘will remain responsible to its creditors for its financial commitments’, the Court implied that the obligations of the ESM under the Articles 14 and 15 of the ESM Treaty, promising financial assistance, do not fall within Article 125 TFEU.97 According to the Court, the granting of the ESM financial assistance ‘in no way implies that the ESM will assume the debts of the recipient Member State’ and merely ‘amounts to the creation of a new debt, owed to the ESM by that recipient Member State, which remains responsible for its commitments to its creditors in respect of its existing debts’.98
As a result, the Court held that Article 125 TFEU does not prohibit financial assistance provided through an intermediary given that the assistance conforms to the objectives of the Treaties and complies with EU law. Based on the faulty reasoning, the Court held that ‘Article 125 TFEU does not prohibit the granting of financial assistance by one or more MS to a MS which remains responsible for its commitments to its creditors provided that the conditions attached to such assistance are such as to prompt that MS to implement a sound budgetary policy’.99
An entity providing financial assistance is effectively liable and assumes the debt irrespective of the fact that the principal duty continues to be assigned to the borrower. The distinguishing element of liability and of assumption of commitments, such as the financial assistance under the ESM, is
97
ibid, para 138; ESM Treaty (n 32), art 14 and 15.
98
Pringle (n 31), para 139.
99
29 that it provides creditors with an additional source of redress in default of a principal debtor.100 As regards the liability and the assumption of commitments, that a principal debtor is formally liable for the outstanding debt obligations is irrelevant as any financial assistance becomes an additional source of redress in a case the principal debtor defaults. According to the Commission, ‘if one considers the transaction as a whole, a default of the borrower (the MS in difficulties) towards the direct lender (the ESM) would lead to an indirect assumption of the debts of that country by the other euro area MS’.101
The EU or a MS providing a loan would de facto repay the debt that would be merely repaid de jure by the MS receiving the financial assistance. Thus, in my view, the phrasing of Article 125 TFEU, ‘shall not be liable or assume’, must include the ESM financial assistance, even if the ensuing requirement is formally distinct.
Concerning the theological argument, based on the goal of Article 125 TFEU, ensuring that the MS adhere to a sound budgetary policy,102 the Court held that ‘Article 125 TFEU prohibits the Union and the MS from granting financial assistance as a result of which the incentive of the recipient MS to conduct a sound budgetary policy is diminished’.103 According to the Court, the strict
conditionality to which all financial assistance provided by the ESM is subject to is to ensure that the recipient MS pursue a sound budgetary policy.104 Thus, ‘the conditionality prescribed… is intended to ensure that the activities of the ESM are compatible with, inter alia, Article 125 TFEU’.105
In this way, as held by the Court, the ESM guarantees that the MS receiving the ESM financial assistance will remain subject to market processes by being obliged to follow a sound budgetary strategy.
100
Tomkin (n 64), 181; Richard Millett and Geraldine Andrews, Law of Guarantees (6td ed, Sweet and Maxwell 2012).
101
Pringle (n 31), Written Observations submitted by the European Commission, para 71.
102 Pringle (n 31), para 135. 103 ibid, para 136. 104 ibid, para 143. 105 ibid, para 111.
30 The theological argument does not consider two points. Firstly, the judges of the ECJ do not
possess the expertise necessary to assess the conditionality of the ESM against the technical conditions of financing within the Eurozone, nor is that their role to do so. Perhaps this fact
signifies one of the reasons why the Court abstained from assessing conditionality when requested to do so in the latter cases.106 According to Everson, the question of whether the strict
conditionality of the financial assistance precludes the ESM from undermining the incentives of the MS to pursue a sound budgetary policy could not possibly be answered, even by an economic expert, in the abstract.107 The strict conditionality of the ESM regime represents a collection of assumptions as regards the sacrifices the market would have required of the debtor MS had they not been unable to handle the pressures of the market, to begin with.108 While the court predicated the legality of the ESM financial assistance on the strict conditionality, it is difficult to imagine financial assistance on the level established by the ESM without attached conditions. According to Tomkin, it is practically unthinkable that the Eurozone MS would directly and fully assume a financial burden on the scale of the ESM without imposing conditions on the beneficiary Eurozone MS.109
Secondly, the limits of Article 125 TFEU established by the Court do not have a legal basis. Instead, the Treaties made a clear choice that the aim, safeguarding that the MS follow a sound budgetary policy, is to be attained by the prohibition encompassed within Article 125 TFEU, which necessitates that neither the Union nor a MS are to ‘be liable for… the commitments’ of another MS or ‘assume [those commitments]’. The Court disregarded the choice of the Treaties by
106
Case C‑665/13 Sindicato Nacional dos Profissionais de Seguros e Afins v Via Directa —
Companhia de Seguros SA [2014] ECLI:EU:C:2014:2327; Case C-128/12 Sindicato dos Bancários do Norte and Others v BPN – Banco Português de Negócios SA [2013] ECLI:EU:C:2013:149.
107
Everson (n 54), 495.
108
Michelle Everson, ‘A Technocracy of Governing: Power without the State; Power without the Market’in Christian Joerges and Carola Glinski (eds), The European Crisis and the Transformation
of Transnational Governance (Hart Publishing 2014), 229.
109
31 assessing whether the ESM, considering its strict conditionality, hinders the aim of Article 125 TFEU, rather than whether the financial assistance mechanism violates the prohibition
encompassed within the Treaties.
The judgment leads to an assumption that as long as financial assistance is both indispensable for the safeguarding of financial stability of the Eurozone and subject to strict conditions it does not violate Article 125 TFEU.110 In my view, this assumption is irreconcilable with the prohibition encompassed within Article 125 TFEU and thus this paper submits that the Court creatively and innovatively the legal provision. Also, the creative and innovative interpretation of Article 125 TFEU was grounded in legal reasoning that I find unconvincing due to the presented faults in both the theological argument and the argument based on legal formalism. Still, Professor Smits may disagree with the conclusion this paper arrives at, both in regard to the wider implications of the judgment and the interpretation of Article 125 TFEU, on two points.111 Firstly, regarding the interpretation of Article 125 TFEU, while pointing to the existence of financial assistance encompassed within Article 122(2) TFEU, Professor Smits, the same way as the Court, in my view, misinterprets the intention of authors of the current treaty provisions on the EMU to avoid providing financial assistance to negligent and particularly fiscally irresponsible MS as ‘the intention to avoid financial assistance to MS in difficulties’.112
As a consequence of leaving the fiscal authority with the Eurozone MS, the Treaties must ensure that the MS are fiscally
responsible. The preferred method of ensuring fiscal responsibility of the Eurozone MS by the Treaties was to prohibit financial assistance to the fiscally irresponsible MS, yet allowing financial assistance where the financial distress could not have been prevented by the MS.
110
Jaap de Zwaan and others (eds), Governance and Security Issues of the European Union. Challenges Ahead (Springer 2016), 141.
111
René Smits, ‘The European debt crisis and European Union law: comments and a call for action’ (2012) 49 Common Market Law Review 827, 827.
112
32 Secondly, regarding the wider implications of the judgment, according to Professor Smits, ‘the markedly changed circumstances’ call ‘for policymakers to respond in novel fashions’.113
Nonetheless, the legal reasoning of the judgment did not present the ‘the markedly changed circumstances’ as a reason for the creative and innovative interpretation of Article 125 TFEU. As this paper has attempted to demonstrate, as a result of upholding the legality of the ESM, the Court missed a unique opportunity to effectively compel the MS of the Union to further develop
relational space suitable for facilitation of European identity and enhance the fragile structure of the EMU by reforming the EMU through conceding further fiscal powers to the EU in the wake of the possible collapse of the Eurozone. In my view, rather than the illegal and incomplete fix that is the ESM, a reform of the EMU would, in fact, amount to a response of ‘novel fashions’. Perhaps, the proposal to establish a European Monetary Fund based on the ESM, which may be possible without treaty changes, based on Article 352 TFEU, might facilitate the development of a shared European identity by achieving greater fiscal integration in the Eurozone.114
113
ibid.
114
Commission, ‘Proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final; Jürgen Matthes, ‘A European Monetary Fund –
Considerations of Design, Politics and a Preliminary Evaluation’ (2017) 18(3) CESifo Forum 16, 19.
33
2.2 Case C-62/14 Gauweiler and Others v Deutscher Bundestag
Besides the MS jointly acting outside the confines of the EU legal framework and establishing the ESM, the ECB had also played a major role in combatting the financial crisis.115 In Gauweiler, the Court reviewed the legality of a crucial measure adopted by the ECB in its attempt to counter the effects of the European debt crisis. The crisis generated acute distortions in government bond markets that originated in the doubts of investors regarding the irreversibility of the single
currency, leading to a malfunction of the price formation process in government bond markets and destabilisation of the transmission mechanism of the ECB. With an intention to tackle the negative effect generated by the crisis, following the declaration of the ECB President Mario Draghi that ‘within our mandate, the ECB is ready to do whatever it takes to save the euro’ on September 2012,116 the ECB announced the Outright Monetary Transaction (OMT) programme.117 As a result of the programme, the Eurozone MS facing complications in borrowing at sustainable interest rates via the financial markets may ask the ECB to purchase their government bonds on the secondary market on condition that they apply for financial assistance from the ESM.118 Even though the
115
Paul Craig, ‘Economic Governance and the Euro Crisis: Constitutional Architecture and Constitutional Implications’ in Maurice Adams, Federico Fabbrini and Pierre Larouche (eds), The
Constitutionalization of European Budgetary Constraints (Hart Publishing, 2014); Alicia
Hinarejos, The Euro Area Crisis in Constitutional Perspective (Oxford University Press 2015); Hans-Werner Sinn, The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs (Oxford University Press 2014); Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (Cambridge University Press 2014).
116
Mario Draghi, (Global Investment Conference, London, 26 July 2012)
<https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html > accessed 6 June 2019.
117
European Central Bank, ‘Technical Features of Outright Monetary Transaction’ (Press release, 6 Spetember 2012) <https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html> accessed 6 June 2019.
118
34 programme was never put into operation, the OMT is credited for playing a vital role in cooling off the European debt crisis.
2.2.1 Political, Constitutional and Budgetary Sensitivities of MS
The ECB strives to guide the level of prices in the Eurozone through instruments of monetary policy, such as interest rates. If the ECB mechanisms are disturbed by dysfunctional market fragmentation and as a result, the instruments of monetary policy employed by the ECB are not transmitted consistently throughout the Eurozone, the ECB can interfere by purchasing the securities that it generally accepts as collateral on secondary markets. At first, considering the extraordinary state of affairs in the financial market, in particular the fragmentation of the market that was obstructing the transmission of monetary policy instruments, and thus the effective employment of instruments of monetary policy, the ECB decided that a short-term securities markets programme, the Securities Markets Programme (SMP), had to be introduced.119 The aim of the SMP was to tackle the effects of the crisis on the securities markets and re-establish a proper operation of transmission mechanisms of monetary policy instruments.120 National central banks of the Eurozone and the ECB could purchase debt instruments issued by the MS governments or public entities of the Eurozone on the secondary market and debt instruments issued by private entities incorporated in the Eurozone on both the primary and secondary markets.121
After the SMP was concluded, the Outright Monetary Transactions (OMT) programme was announced. The objective of the OMT programme was the preservation of a proper monetary policy transmission and the singleness of the monetary policy.122 The OMT, as opposed to the
119
Decision 2010/281/EU of the European Central Bank establishing a securities markets programme [2010] OJ L124/8. 120 ibid, recital 3. 121 ibid, art 1. 122
‘Technical Features of Outright Monetary Transactions’ (ECB, Sept. 6, 2012),
35 SMP, was subject to strict conditionality to uphold the primacy of the ECB’s price stability
mandate and to guarantee that the Eurozone MS maintain incentives to carry out necessary fiscal changes and structural reorganizations.123 As the unlimited bond purchase programme is subject to neither national constitutional review nor to national parliamentary approval, the budgetary
autonomy of the German parliament may be undermined. The OMT programme endangers the same budgetary autonomy that the political alliance of Germany, France and Italy had pressured the other Eurozone MS signatories to surrender by the establishment of the ESM as the emergency voting procedure prevented the other signatories from stopping a payment from the fund. Because all but 3 Eurozone MS had already conceded certain fiscal authority, the principle of equality among the MS, a fundamental value of the EU constitutional identity, following Article 2 TFEU in conjunction with Article 4(2) TFEU, should prevent the Court from considering the consequences of the OMT programme on the budgetary autonomy of Germany, France and Italy in its
interpretation of Article 123 TFEU.
2.2.2 Law and Legal Reasoning
To preserve a sensible budgetary administration by the MS and protect taxpayers of the fiscally responsible Eurozone MS, prohibition on monetary funding was included in the European Treaties in the form of Article 123 TFEU. The prohibition of monetary financing was inserted into the Treaties to eliminate expectations that deficits would ever be ‘monetised’ by the ECB, dismissing the probability of a state of affairs where through fiscal policy governments could manoeuvre into positions where the EU would be coerced into financing the deficit of that government.124 The Treaties intended to produce an incentive structure where financial markets, in principle, had a strong incentive to insist on fiscal responsibility. As creditors are subjected to losses, they are
123
Paul Craig and Menelaos Markakis, ‘Gauweiler and the Legality of Outright Monetary Transactions’ (2016) 41 European Law Review 1, 5.
124
Thomas Sargent and Neil Wallace, ‘Some unpleasant monetarist arithmetic’ (1981) 5(3) Federal Reserve Bank of Minneapolis Quarterly Review 1.
