The Economic Crises and the Need to Amend the Treaties


Essay, 2012

22 Pages, Grade: 9,00


Excerpt

The Economic Crises and the Need to Amend the Treaty

Abstract

The following paper deals with the economic crises and the need to amend the treaty. A short introduction on the origins and the development of the European economic crises will be given, because in order to understand the plans and discussions regarding a treaty amendment and how a treaty amendment can be legally implemented, it is helpful to explain the reasons for such an amendment. Consequently a brief introduction into the development of the economic crises is given. Beside these highly theoretically issues, the paper mainly discusses the question whether there is an acute but mainly a legal need to amend the treaties on the European Union, especially with regard to the current economic situation of the Union and its Member States. Due to the fact that this is a particularly political topic it mainly concentrates on the legal requirements, problems and consequences of a possible treaty amendment. That approach can be justified by the fact that the political matters linked to that topic are almost inexhaustible and would overshadow the legal aspects. But the legal aspects are of great significance, because the planned measures have to comply with EU law and the national laws of the Member States in order to be successfully adopted.

Introduction

As the paper deals with the question whether there is an acute but mainly a legal need to amend the EU treaties, especially with regard to the current economic situation of the Union, the origins and the course of the economic crises is discussed first. Thereby the link between the international financial crisis, which started with the collapse of Lehmann Brothers in 2008, and the crisis of the European Union, which started in 2010 with the liquidity and financial problems of certain euro zone states, is explained. In the next step it is dealt with the legal basis for a treaty amendment in general, because before the question regarding a need to amend the treaties can be answered, it has to be determined how a treaty amendment could be completed. Therefore the Lisbon Treaty is of importance as it introduced a change of Article 48 TEU and thus established additional procedures to amend the treaties. These procedures are explained in more detail. After that section, the actually planned amendment is discussed. That discussion includes the plan to add an additional paragraph to Article 136 TFEU and to substitute the current crisis mechanisms, the European Financial Stabilisation Mechanism (later referred to as: EFSM) and the European Financial Stability Facility (later referred to as: EFSF) with the European Stability Mechanism (later referred to as: ESM). Subsequently, the question regarding a legal need to substitute the EFSF and the EFSM is examined. Thereby possible legal violations by both mechanisms are considered. Finally, before a conclusion can be drawn, the current state of affairs is described. Thereby one comes to know about the amend process so far and how a possible result of the whole proposal could look like. The conclusion reflects the different elements and information given in the paper and tries to give a final answer to the question whether it is legally necessary to amend the treaties on the European Union.

The Economic Crises – basic information

Following 2001 the Federal Reserve lowered the interest rate to supply the market with liquidity.[1] Since then, many Americans got an ever-higher credit approval, due to rising housing prices and therewith - higher collateral. Most of these were sub-prime debtors, people with a low credit ranking.[2] Banks issued new credits to these sub-prime house owners due to the incremental appreciation of their houses. That worked until the market peaked.[3] After the peak an outselling of Collateralized Debt Obligations (CDOs) by international investors started, because of the default of some of these tranches.[4] CDOs are asset backed securities were banks take the underlying real estate property as collateral and sell the claims to investors. For this reason banks do not need any equity to back these credits, as required for traditional mortgages, and the market got flooded with mortgage contracts. Since many investment banks did not have a deposit-banking service, they were in serious trouble regarding their liquidity.[5] To grasp the overall picture, one could say that long-term illiquid property assets were financed with short-term investments.

This led to liquidity problems of banks, because of the highly internationalized financial industry, investors all over the word sold their investments and searched for the safe heaven – US treasuries or gold. Banks were not able to refinance their on-going business operations, because the market lost trust into these financial institutions. The US government bailed out troubled financial institutions in the first place, such as Bear Stearns, AIG or Fannie Mac.[6] But at one point in time the government was not willing to finance the system with more taxpayers’ money. The result was the international financial crisis, starting with the crash of Lehman Brothers on the 15th of September 2008. The governments all over the world had to support systemic financial institutions with liquidity to circumvent a collapse of the world financial system. That led to even more indebtedness by governments.

Those warranties for financial institutions by governments, especially in Europe led to the euro crisis in 2010. This was mainly triggered through weaker economies such as Portugal, Ireland, Greece and Spain (PIGS). The European Union had to back up these states with liquidity and guarantee their debt obligations. Those states in return accepted long-term savings and consolidation policies. The reasons for the tremendous amounts of debt were partly a common problem and partly idiosyncratic issues. The following paragraph will discuss the idiosyncrasies of the PIGS states.

All European states had higher amounts of debt since they had to introduce economic stimulus after the financial crisis in 2008. So the foundation of the euro crisis roots partly in the collapse of Lehman Brothers in 2008, and the following financial crisis.[7] The economic stimulus was necessary because the financial crisis had a noticeable impact on the real economy in Europe as well as in the whole world. In addition to that, Ireland and Portugal had neglected the budgetary discipline for years, even though it is determined in Article 126(1) TFEU that Member States should avoid excessive government deficits.[8] Spain was reluctant to reforms and streamlining of its system. The result, still in existence, is a troubled economy, high unemployment rate especially in the younger segment and a country in a long-term recession.[9]

Greece was able to overtrump the structural problems and the neglected budgetary discipline. In addition to those two problems, they streamlined their debt reporting with the help of Goldman Sachs to appear as a member state that fulfils the criteria of the Maastricht treaty.[10] Since international investors were able to realize these problems, the refinancing cost of these member states climbed to horrifying rates, ranging from five to eight per cent for a ten-year government bond from Italy to nearly 28 per cent for a ten-year government bond from Greece. This induced the European Union to give quasi-guarantees for the debt of their Member States and initiated the ECB to buy government bonds for the first time in history to support the interest rate for the troubled Member States.[11]

But since this disembogued in discussions about numerous reforms and amendments by the European Union, the legal issues regarding the economic crises and a possible amendment of the EU treaties, follow in the next sections of that paper.

Potential procedures for a treaty amendment

It was the Lisbon Treaty that introduced a change on how EU treaties can be amended with respect to Article 48 of the TEU. With the Lisbon Treaty, Article 48 was extended and made more flexible.[12] One can make a distinction between different procedures in order to amend the treaties.[13]

First of all there is the ordinary revision procedure that is enshrined in paragraphs 2 to 5 of Article 48 TEU.[14] That procedure can be interpreted as the standard procedure used for treaty amendments. National governments, the European Parliament or the European Commission may initiate a proposal regarding a treaty reform under the procedure, which is determined in Article 48(2) TEU.[15] The ordinary revision procedure can one the one hand be applied to so-called ‘prominent’ treaty changes. These are changes that require a significant reform with regard to the EU treaties. On the other hand the procedure applies to minor reforms, where the simplified revision procedure cannot be implemented.[16]

The actual sequence of the ordinary revision procedure, can be shortly illustrates as follows: As already stated above, any national government, the European Parliament or the European Commission may make a proposal for treaty change. The proposed treaty change may refer to any manner in the treaties, even though measures that would increase the Union´s competences.[17] The proposal is forwarded to the Council, which addresses it to the European Council and reports it to the national governments.[18] Even though the national parliaments have no official task or power under the procedure, theoretically they can already approach examination of the proposal, provided they are notified of it. In the next step the European Council must seek the opinion of European Parliament and the European Commission. In case of ‘institutional changes to monetary policy’ the view of the European Central Bank is required.[19] In case of fiscal policy reforms the discretion to consult the ECB is left to the European Council. It is the task of the European Council to vote on the proposal. Article 48(3) TEU states that a simple majority is needed in order to reach the next stage of the procedure.[20]

Now two possibilities arise: The first option is that the President of the European Council has an automatic mandate to convene a Convention in order to consider the draft proposal and reach consensus to recommend a future Intergovernmental Conference (IGC). In the treaties there are no specific rules of procedure for the convention, except that the Convention should comprise representatives from national parliaments, national governments, the European Parliament and the Commission. As a result national governments lose their preeminent position with regard to treaty reforms. Even though Article 48 TEU does not require the IGC to accept the recommendations made by the Convention, because it would be unreasonable to integrate a Convention in the process if no attention is paid to it. Nevertheless it should be kept in mind that the Member States still have a dominant position as they may sign off on the treaty reform´s final version in an IGC.[21] But the second option is different, as the European Council may vote not to convene a Convention. Therefore they must have reached a simple majority and the European Parliament must have given its consent to it. If a convention has come into existence it has to reach consensus about a draft treaty, which has to be put forward to an IGC. Under the circumstances of that second option it is the European Council that defines the mandate of the IGC. The IGC has to agree on the treaty´s final version. Afterwards all Member States, using their own national procedure, must ratify the proposal, regulated in Article 48(4) TEU.[22]

The second procedure is the simplified revision procedure. The Lisbon Treaty introduced two forms of simplified revision procedures, determined in Article 48(6) and 48(7) TEU. It differs form the ordinary revision procedure, because it aims to provide for a simplified decision making process with regard to specific parts of the treaties. That is why it is one of the so-called flexibility mechanisms in the EU treaties, introduced by the Lisbon Treaty. The simplified revision procedure described in Article 48(6) TEU grants power of treaty making to the European Council, but is subject to two conditions: Firstly, it can only be applied to Part Three of the Treaty on the Functioning of the European Union, which means that it is only allowed for substantive changes with regard to EU internal policies. Secondly, it may not make any alterations with regard to the competences of the European Union. If the Union´s competences are increased by the amendment, the ordinary revision procedure has to be applied.[23]

[...]


[1] Trunk 2010, p.24

[2] Trunk 2010, p. 24

[3] Ibid., p.25

[4] Ibid., p.25

[5] Berk& DeMarzo 2011, p.808

[6] Trunk 2010, p.26

[7] Trunk 2010, p.26

[8] TFEU

[9] Trunk 2010, p.28

[10] The New York Times- Global Business, available at: http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=all

[11] Trunk 2010, p.28

[12] de Witte 2011, p.2

[13] ó Broin 2010, p.1

[14] de Witte 2011, p.3

[15] ó Broin 2010, p.4

[16] ó Broin, p.2

[17] Ibid., p.4

[18] Ibid., p.4

[19] Ibid., p.3

[20] Ibid., p.4

[21] ó Broin, p.4

[22] Ibid., p.4

[23] de Witte 2011 p. 4

Excerpt out of 22 pages

Details

Title
The Economic Crises and the Need to Amend the Treaties
College
Maastricht University  (Rechtsgelehrtheit )
Course
European Union Law - Foundations
Grade
9,00
Author
Year
2012
Pages
22
Catalog Number
V215154
ISBN (eBook)
9783656428022
ISBN (Book)
9783656438489
File size
528 KB
Language
English
Tags
Economic crisis, European Union, Treaty Amendement
Quote paper
Julia Nichtern (Author), 2012, The Economic Crises and the Need to Amend the Treaties, Munich, GRIN Verlag, https://www.grin.com/document/215154

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