The ESM. A Breach of the Treaties?

TABLE OF CONTENTS

The ESM – A Breach of the Treaties?

A. Introduction
I. Im Nachhinein ist man immer schlauer
II. Different Interests, different Opinions
1. Cyprus
2. Banking Union
3. OMT
4. Euro Bonds
III. The Law and the Crisis

B. What is the ESM?
I. Overview
II. The idea: No dependence on the market’s rules
III. Legal basis and status

C. Situation before the ESM

D. The ECJ Pringle-Case
I. Correct procedure?
1. Only provisions of Part Three?
a. Monetary Policy
aa. Everything already ‘clear’?
bb. Consultation of the ECB
b. Coordination of the Member States’ economic policies
2. Increases the competences conferred on the Union?
3. Summary
III. Compliance with the other Treaty Provisions
1. Exclusive Union competence
a. Monetary policy.
b. Conclusion of international agreements
2. Prohibition by the Treaties
a. Financial assistance by the Union in exceptional cases (Art. 122 (2) TFEU)
b. Art. 123 TFEU
c. No-bailout clause
IV. Conclusion

E. Judgement of the BVerfG of 12 September 2012
I. Overview
1. National Constitutions and European Law
a. Maastricht Judgement (1992)
b. Treaty of Lisbon (2009)
c. Mangold (2010)
d. Financial assistance for Greece and Rescuing of the Euro (2011)
e. Application in practice
II. The BVerfG’s interpretation of the ESM Treaty (TESM)
1. The budgetary power of the Parliament
2. Limited liability
a. Other shares
b. Capital calls
c. Coverage of Losses
d. First requirement of the Court
3. The German Parliament’s right of information
a. Prohibition of Disclosure and Immunity
b. Interpretation
aa. Systematic approach
bb. Spirit and purpose of the Law
c. Second requirement of the Court
4. Ensuring the BVerfG’s interpretation
5. Summary
III. The BVerfG’s opinion on the ECB’s OMT Program
1. Overview
2. The principle of Article 123 (2) TFEU
3. An unlawful avoidance of the principle?

F. Conclusion

Literature

THE ESM – A BREACH OF THE TREATIES?

This is an examination of the European Law’s legal value in the Euro-Crisis, using the example of the European Stability Mechanism.

A. Introduction

I. Im Nachhinein ist man immer schlauer…

That is a German saying, which is used regularly in daily life. Translated analogously, it means that, when you are looking back into the past, it is always easy for you to judge whether a decision was right or wrong.

But real life is not science-fiction. When decisions have to be made, the decision makers unfortunately cannot switch into the retrospect. Therefore there is never an absolute guarantee that a decision is the ultimately right one or that there is no other path that could lead to the same or even better result. Although you will always find people that are totally convinced of their ideas, praising them as the only right way to go, these ideas about the same issue often differ remarkably. Dissent, discussions and even, in short: a dialogue between opposing parties is necessary to find a solution. That is a very generous declaration.

But of course, exactly the same process happens when it comes to the European Financial Crisis. Nobody knows with absolute certainty, which measures will lead to the desired results. But decisions have to be made.

II. Different Interests, different Opinions

In general there are always two main models, which are always discussed. The first one is the liberal approach. It could be the ‘ Darwin-Model ’. Nobody cares for anybody, except for himself. There is no financial assistance at all. If a bank or a state fails to pay its debts, it will go bankrupt. The ‘survival of the fittest’-argument is that the failure of a bad bank offers space for a future good bank.^[1]

The opposite approach is the ‘ Solidarity-Model ’. Everybody cares for each other. Banks are rescued by the states, insolvent states are rescued by other states, respectively its tax payers. It is based on Keynes’ belief that putting money into markets is superior to saving money.

The Darwin Model is always, favoured by the solvent states, who do not want be liable for other state’s debts. Of course, these (almost) insolvent states promote the second model. The golden way is probably somewhere in the middle.

1. Cyprus

The discussions how to handle Cyprus - the latest “European Problem” - clearly show these different views. This time, even the possibility of a bankruptcy was not absolutely excluded. The German Chancellor (Kanzlerin)

Angela Merkel, maybe frustrated of the too hesitant efforts by Cyprus’ government, announced in March, that at least, she didn’t want Cyprus to crash. ^[2]

That did not happen yet. Again, the European tax payers had to help out – the ‘Solidarity Model’ came to play. The current recue plans includes financial assistance of €10 billion from the European Stability Fund (ESM) and the International Monetary Fund (IMF). But there was also a little bit of the ‘Darwin-Model’ included, as Cyprus has to raise € 13 billion itself. Its parliament had declined the proposal to force all depositors to bear losses – also small investors with a deposit lower than € 100,000. Now it is only the ‘rich’ depositors, people with more money on account than € 100,000, of Cyprus two biggest banks, who will lose huge parts of their assets.^[3]

Jeroen Dijsselbloem, the Euro group’s new chairman, was the bereaved, who was honest enough to admit, that the involvement of depositors to carry the risk might also be a fair and proper solution, instead of relying on the tax payers. He was massively criticized for that and accused to jeopardize the success of the banking union. ^[4]

2. Banking Union

The banking union deal was signed in December last year ^[5] and contains two main features. First, there is the Single Supervisory Mechanism. That means that from July 2014 all ‘systemic – relevant’ banks in the Euro Area will be supervised by a common institution. Finally, it was agreed that the European Central Bank (ECB) should be that institution and that its independence was not endangered by the new role. However, it remains unclear how the supervisory for the smaller banks is going to work. The request to leave this also to the ECB had been denied. There would be no task for the national supervisors anymore and – more important – the supervisory of around 6,200 banks would blast the ECB’s personal capacities by far. Nevertheless, the ECB will have some influence on that supervisory. At the moment, that range of this power is not defined and there is some delay. One reason for that is that German federal elections (Bundestagswahlen) are going to be held in September this year. The CDU, Merkel’s reigning government party, has lately lost in some important state elections

(Landtagswahlen). Therefore they are afraid of having the unpleasant duty to explain its voters, why one of their national banks had been closed on an order from the ECB. ^[6]

Secondly, in return for the accommodation, that these banks are supervised by a non – domestic authority, the national banks can receive financial assistance directly from the ESM.

3. OMT

The ECB’s president Mario Draghi announced in July 2013, that the ECB will do “whatever it takes” to save the euro. The core of this bringing out of the heavy artillery was the Outright Monetary Program (OMT) - the unlimited purchase of debt instruments from problem states by the ECB. ^[7] That commitment made him the Financial Time’s Man of the Year. ^[8] It was a move that falls into the “Solidarity Model” category.

Mario Draghi had to defend his idea against massive protest, especially from Germany. Many German economic experts criticized the approach, ^[9] and even Jens Weidmann, the president of the German Federal Bank (Deutsche Bundesbank) and a member of the ECB council considered the OMT to exceed to ECB’s mandate and voted against it. ^[10]

The ECB had also been confronted with the allegation to act unlawful, because their action would infringe Art. 123 (2) TFEU. We will come back to that later.

4. Euro Bonds

The core of the “Solidarity Model” would be “Euro Bonds”. Something that has been requested by problem

states since the crisis emerged. It could also be described as common liability. Germany’s chancellor Angela

Markel has fought the idea of Euro Bonds from day one. She made the significant statement, that, “there will be no Euro Bonds as long as I am living”. ^[11]

III. The Law and the Crisis

That was just a short overview. However, the purpose of this paper is not to give an opinion on the effectiveness of these measures.

What we will discuss here is the role of the European Law. Laws are rules for a crisis. When humans are living together, that has always been accompanied by conflicts. That’s why law was made. It is a preventive guideline for a future ‘crisis’ - in the small sphere between arguing neighbours, but also for big issues. We will examine how the law was followed here.

The example is the European Stability Mechanism (ESM). After a brief explanation on what the ESM is and why it was established, the compliance with European Law will be discussed by going through the ECJ’s judgement in the “Pringle-Case” from November 2012. Secondly the paper will refer to the German Federal Court’s “ESM- judgement”, which was published two months earlier.

B. What is the ESM?

I. Overview

The ESM was established to provide financial assistance to ESM Member States, which are experiencing, or are threatened by severe financing problems according to Article 3 of the Treaty Establishing the ESM (TESM).^[12] It replaces the EFSF. Other than this fund, the ESM is considered not to be a temporary rescue, but a permanent crisis resolution mechanism.^[13]

The ESM members, which is the Euro Area Member States, authorise a certain amount of money to the disposal of the ESM. This total lending capacity (authorised share capital) is €700 billion (Article 8 (1) TESM). Every

Member State contributes according to a key which is listed in Annex I to the TESM (Article 11 TESM). ^[14] Of this amount, €80 billion are so called ‘paid-in shares’, which is directly callable capital (Art. 8 (2) TESM). The liability of every Member State shall be limited to its portion of the authorised share capital (Art. 8 (5) TESM). ^[15]

The ESM has a Board of Governors and a Board of Directors (Article 6 TESM). The Board of Governors consists of respectively one member of government from every Member State, usually the Minister of Finance (Article 5 (1) TESM). ^[16] The competences are listed under Article 9 et seqq. TESM. In general, it can be stated, that the decisive power is settled here, while the execution can be delegated (Article 5 (6) lit. m TESM) to the experts’ body, the Board of Directors (Art. 6 (1) TESM). ^[17] The current Managing Director is Mr Klaus Regling from Germany.

II. The idea: No dependence on the market’s rules

The original concept was that Member States should remain as independent as possible, although they are a part of the EU and later the Euro Area. No other state or authority should be entitled to dictate national governments how to balance their budget. Nevertheless a balanced market is necessary in a multinational community of states, like the European Union, especially with a common currency. In order to achieve that, it was decided that the market’s rules would be the best to control the Member State’s financial behaviour. The idea is quite simple. The market is an independent and fair institution, without any political interests. If a Member State runs into debts and investors doubt its solvency, the interest rates will increase by nature. Consequently the money is an inducement for every Member State. Unfortunately, there was no procedure for failure. The situation when a state has run into debts and its creditworthiness is already rated so badly, that it is almost impossible to make a ‘come back’ and recover. A single state couldn’t make it on its own. In fact, bankruptcy had not been envisaged. As soon as exactly that problem came up with a struggling Greece, the other states realized that they could not afford to let even one single state down. The ‘systemic risk’ that in a complex structure the problems would encroach on the other states’ banks was considered to be unacceptable. So it was agreed, that the once so favoured market is not the solution anymore.

The ESM is an attempt to interrupt the ‘race to the bottom’. The idea behind it is, that the ESM borrows money from investors, the ‚market‘. It is expected, that a good rating will be achieved, because ‚reliable‘ creditors have declared their liability. Therefore the ESM can get the money to relatively low interest rates.^[18] In the next step,

the ESM lends money to struggling Member States – to lower interest rates than the market would give them. The ESM is an intermediary to make the poorly rated Member States benefit from the good rating of the financially sound states.

The ‘rules of the market’ cannot be circumvented by this. The reputation of ‘reliable’ states is used. Of course there is the risk that in turn, the rating of these will go down as well. Especially when no positive change can be recognized in the ‘problem – states’. In order to prevent, that the ESM is not much more than a big purse and is based solely on the belief that the ‘problem-states’ will resurrect economically somehow, a ESM loan is only granted under strict conditionality.

Article 12 (1) TESM sets the requirement that financial assistance may only be granted if the situation is

“[…] indispensable to safeguard the financial stability of the Euro Area as a whole […]”

In return for the loan, the receiving states must agree to fulfil certain conditions, which are attached. The

incentive is now “money for reforms”.^[19]

III. Legal basis and status

The ESM is established as an intergovernmental organisation under public international law. Although its 17 Members are all Member States of the EU, it is important to note that the ESM is not an EU institution. Nevertheless EU Law was amended to allow the establishment of the ESM. The ESM is a ‘Euro Area institution’. We will come back to the question, how this works together.

C. Situation before the ESM

The TESM lays down, that in general, financial assistance from one Member State to another is prohibited (Art. 125 TFEU). The exception is Article 122 (2) TFEU. The Union, not the Member States, may grant financial assistance,

[…] where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural

disasters or exceptional occurrences beyond its control […].

It has already been doubted, whether the Greek Loan Facility and the establishment of the EFSF were compatible with that system. While it is true that Greece was and still is in serious difficulties and indeed the Financial Crisis might be considered as such an exceptional occurrence, it is questionable if Greece’s problems were caused by the Financial Crisis, or moreover by self-inflicted misconduct. That would be something that, at least at that time, could have been controlled. ^[20]

Other than the EFSF, the ESM is a permanent stability mechanism. As the compliance with EU Law was already contested for the temporary EFSF, it was highly questionable how the ESM could be combined with the Treaties. Therefore the Treaties were amended by Council Decision 2011/199 (The Council Decision), by adding a third paragraph to Article 136 TFEU. Recital 4 of the preamble hereto clearly shows, that the signing parties saw the necessity, to no longer rely on Article 122 (2) TFEU:

“[…] Article 122 (2) […] TFEU will no longer be needed for such purposes. The Heads of State or Government therefore agreed that it should not be used for such purposes. […]”

There are still lots of open questions. But as the ECJ had to examine the lawfulness of that new provision and the ESM, we will try to find answers by going through the judgement.

D. The ECJ Pringle-Case

After Mr Thomas Pringle, a member of the Irish Parliament, brought proceedings against the Government of Ireland, the Republic of Ireland and the Irish Attorney General on 13 April 2012, the Irish Supreme Court had asked for a preliminary ruling under Article 267 TFEU. The Supreme Court questioned the validity of The Council Decision and asked, whether the ratification of the Treaty establishing the European Stability Mechanism (‘ TESM’) would be incompatible with the Union treaties.

The arguable Council Decision amended Article 136 of the TFEU, allowing the euro-states to establish a permanent stability mechanism:

Article 136 (3) TFEU

“The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the Euro Area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Therefore the European Court of Justice (‘ECJ’) had to take a firm stand. The Court now had to give a judgement on the question whether the ESM would be a breach of the treaties. The appeal by the Irish Supreme court was made on 31 August 2012. The ESM was intended to start on 1 January 2013. Consequently the European judges were facing a tough situation here, as they did not have much time to decide on an issue that might be extremely important for the future of the European Union. Of course the court was entitled to take more time, but with regard to the consequences the judgement was issued on 27 November 2012. Nevertheless it is very important to keep in mind under which circumstances this judgement had been generated. The ECJ acted under pressure as their power implies the responsibility to ensure the there is no breach with Union Law, but also the judges were responsible for the Union’s future. This should not necessarily be a conflict of interests as European Law was made to ensure the Union’s future. However, in the case of a crisis things are generally often a little different. Law is sometimes regarded as being something highly impractical and unnecessary, only hindering the politicians from undertaking the necessary measures immediately. It will be interesting to examine how the ECJ dealt with such a difficult situation in the ’Pringle – Judgement’.

I. Correct procedure?

The Council applied the ‘simplified revision procedure’ under Article 48 (6) TEU to adopt the Decision inserting Article 136 (3) TFEU. ^[21] The question is whether that was the correct procedure and if as a result the Decision and Article 136 (3) TFEU are invalid.

1. Only provisions of Part Three?

Article 48 (6) TEU lays down under which conditions the simplified revision procedure can be applied. In paragraph one and two it is pointed out that solely provisions of Part Three of the TFEU may be revised:

Article 48 (6) (1) TEU

“The Government of any Member State, the European Parliament or the Commission may submit to the European Council proposals for revising all or part of the provisions of Part Three of the Treaty on the Functioning of the European Union [...].”

Article 48 (6) (2) S. 1 TEU

“The European Council may adopt a decision amending all or part of the provisions of Part Three of the Treaty

on the Functioning of the European Union. [...]”

Therefore the ECJ had to examine, if the amendment of Article 136 TFEU concerns solely provisions of Part Three. As Article 136 TFEU is a provision of Part Three, the formal requirement is fulfilled. ^[22] Nevertheless the Irish Court raised the question whether the revision envisaged by the Decision does not also effect provisions of Part One of the TFEU. ^[23]

a. Monetary Policy

According to Article 3 (1) (c) TFEU, the Union has the ‘exclusive competence’ in the area of ‘monetary policy for the member states whose currency is the Euro’. As Article 2 (1) TFEU lays down, an exclusive competence means that ‘only the Union’ may legislate in that specific area. However, the envisaged Article 136 (3) TFEU empowers not the ‘Union’, but the ‘Member States whose currency is the euro’ to establish the ESM. Given that there is a clear distinction between the Union and its ‘Euro Area’, it has to be examined, whether ‘monetary policy’, for which the Union has the exclusive competence, is affected by the amendment of Article 136 TFEU. If a permanent stability mechanism had to be considered as a “monetary policy”- measure, but nevertheless could be established by the euro zone and not the Union, that would encroach on the Union’s competence. Consequently, Part One of the TFEU would be effected, thus Article 48 (6) TFEU would not have been the

correct procedure and as a result, the Decision would be invalid. ^[24]

[...]

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^[1] The president of the German Institute for Economic Research (Institut für Wirtschaftsforschung) Hans-Werner Sinn is a huge supporter of this approach. DER SPIEGEL, 96/2012, S. 96-99.

^[2] “Ich wünsche mir nicht dass es in Zypern zum Crash kommt”. SPIEGEL ONLINE, „Merkel in der Zypern- Krise – Die Rückkehr der eisernen Kanzlerin“ (Merkel and the Crisis in Cyprus – The Return of the Iron Chancellor), 22.03.2013, at: http://www.spiegel.de/politik/deutschland/zypern-krise-merkel-erhoeht-den-druck- a-890361.html.

^[3] SPIEGEL ONLINE, „Rettungsplan für Zypern: Das Sechs-Milliarden Euro Wunder“ (Rescue Plan for Cyprus: A six-billions euro miracle), 12.04.2013, at: http://www.spiegel.de/wirtschaft/soziales/rettungsplan-fuer-zypern- wo-die-neuen-milliarden-herkommen-sollen-a-894082.html.

^[4] The Economist, “Banking Disunion – Some worrying signals from Cyprus and the Eurogroup’s new chairman”, 06.04.2013, p. 64.

^[5] SPIEGEL ONLINE, “Fixing the Crisis – Eurozone agrees to Bank Oversight Deal”, 13.12.2012, at: http://www.spiegel.de/international/europe/euro-zone-finance-ministers-agree- to-bank-oversight-deal-a- 872680.html.

^[6] Reuters, “Most EU bank union work can be done without law change: Eurogroup head”, 20.04.2013, at: http://www.reuters.com/article/2013/04/20/us-eu-bankingunion-dijsselbloem-idUSBRE93J0F720130420.

^[7] ECB, Monthly Bulletin 2012/9, 7.

^[8] FINANCIAL TIMES ONLINE, “FT Person of the Year: Mario Draghi – ‘Whatever it takes’ the Italian determined to save the Euro”, 13.12.2013. at: http://www.ft.com/intl/cms/s/0/8fca75b8-4535-11e2-838f- 00144feabdc0.html#axzz2R7HwA8Wk.

^[9] SPIEGEL ONLINE, “Many concerned that ECB Bond buying program under Draghi is illegal”, 02.10.2013, at: http://www.spiegel.de/international/europe/many-concerned-that-ecb-bond-buying-program-under-draghi-is- illegal-a-858915.html.

^[10] However, he was the only one in the ECB Council. SPIEGEL ONLINE, “Weidmann bekräftigt seine Kritik an EZB-Anleihekäufen” (Weidmann affirms his criticism for the OMT), 06.09.2012, at: http://www.spiegel.de/wirtschaft/unternehmen/weidmann-bekraeftigt-seine-kritik-an-ezb-anleihenkaeufen-a- 854402.html.

^[11] “Kein Euro-Bonds, solange ich lebe!”. That statement made German comedians joke about her self- conception, whether she did not even think about being deselected anymore.

^[12] The TESM was originally signed by the finance ministers of the 17 Euro Area countries on 11.07.2011. A modified version of the Treaty was signed o 02.02.012. The TESM entered into force on 27.11. 2012 and the ESM was inaugurated on 08.11.2012 following ratification by all 17 Euro Area Member States.(at: http://www.esm.europa.eu/about/index.htm.)

^[13] The European Financial Stability Facility (EFSF) was the ESM’s predecessor. It was a temporarily limited rescue mechanism, which has been created by the Euro Area Member States following decisions taken on 09.05.2010. The two institutions will function concurrently until mid 2013. After that, the EFSF will not enter into any new programmes. However it will continue the management and repayment of any outstanding debt. (at: http://www.esm.europa.eu/about/index.htm.)

^[14] Germany is the biggest creditor with a percentage of more than 27 %. Germany, France (2nd: 20,39 %), Italy (3rd: 17,91 %) combined, these states liable for 2/3 of the ESM’s lending capacity.

^[15] Germany: € 190 billion, France: € 143 billion and Italy: € 125 billion.

^[16] Board of Governors, at: http://www.esm.europa.eu/about/governance/board-of-governors/index.htm.

^[17] Board of Directors, at: http://www.esm.europa.eu/about/governance/board-of-directors/index.htm.

^[18] Although it has been downgraded by Moody’s from the highest rating Aaa to Aa1, because they doubted France’s creditor status, 30.11.2012, at: http://www.moodys.com/research/Moodys-downgrades-ESM-to-Aa1- from-Aaa-and-EFSF-to--PR_261114. Fitch still rates the ESM with its highest rating (AAA).

^[19] Spain was the first Member State, that requested financial assistance fro the ESM, in return they agreed to reform their banking sector as a whole. At: http://www.esm.europa.eu/pdf/FAQ%20spain%2007120212.pdf.

^[20] Therefore some take the stand, that the Greek Loan Facility was unlawful. For instance: Hentschelmann, EuR 2011, 297 et seq; However it has also been proposed to take a wider interpretation, when the EU as a whole in endangered: Häde, EuR 2010, 860.

^[21] Recital 1, Council Decision 2011/199.

^[22] ECJ C-370/12, No. 46.

^[23] ECJ C-370/12, No. 47.

^[24] ECJ C-370/12, No. 52.