The European Citizens’ Initiative & Greek debt: An unlikely combination

Anastasia Karatzia, Lecturer in Law, University of Essex

Introduction

It is not every day that we see CJEU judgments on the European and Monetary Union (EMU). A simple search on Curia with the words ‘Economic and Monetary Policy’ results in relatively few cases including a couple of seminal judgments published in the past five years, such as Pringle and Gauweiler (discussed here), which relate to measures taken for the management of the Eurozone crisis. One of the results of this search is the case of Anagnostakis v Commission, which challenges the refusal of the Commission to register Mr. Anagnostakis’ proposed European Citizens’ Initiative (ECI) ‘One million signatures for solidarity’.

Mr. Anagnostakis submitted his proposed Initiative to the Commission in July 2012. According to the text of the proposal, the objective of the Initiative was the establishment, in EU law, of a principle of ‘the state of necessity, in accordance with which, when the financial and political existence of a Member State is threatened by the servicing of abhorrent debt, the refusal to repay that debt is necessary and justifiable.’ The proposed ECI mentioned Articles 119 - 144 TFEU (the Treaty provisions on EMU) as the legal basis for its adoption. In September 2012, the Commission refused to register Mr. Anagnostakis’ proposal on the ground that the proposal did not fulfil the conditions of Article 4(2)(b) of the ECI Regulation, as it ‘fell manifestly outside the scope of the Commission’s powers to submit a proposal for the adoption of a legal act of the Union for the purpose of implementing the Treaty’.

The letter of refusal sent to the organiser stated that the Commission had examined the Treaty provisions referred to in the proposed ECI, in particular Article 136(1) TFEU ‘and all other possible legal bases’, before concluding that the proposed Initiative should be refused registration. On 11 October 2012, Mr. Anagnostakis challenged the refusal of his Initiative, claiming that the Commission could have registered the ECI on the basis of Article 122(1), Article 122(2), Article 136(1)(b) TFEU, and rules of international law. The General Court found that the Commission had not committed an error in law by refusing to register the proposal and thus dismissed the case. It also ruled that the Commission had complied with its obligation to state reasons, after examining this procedural ground on its own motion.

The applicant appealed the judgment of the General Court, and the European Court of Justice (ECJ) delivered its judgment on 12 September 2017. This commentary, which is the third in a line of posts in ‘EU Law Analysis’ on ECI-cases (see earlier comments on the TTIP/CETA and Minority Safepack cases), will focus on the ECJ’s judgment, which is the first and currently the only ECJ judgment relating to an ECI. Interestingly, the judgment was delivered by the Grand Chamber, possibly because of the novel nature of the subject matter, or (/and) because of the politically sensitive nature of the Initiative.

In addition to this first ECI judgment, the Commission’s Proposal for a new ECI Regulation, was recently published and was presented earlier this week (28 November) by the First Vice President Timmermans to the European Parliament. The commentary will conclude by briefly looking at a specific aspect of the Commission’s Proposal, namely the suggested formalisation of the partial registration of an ECI.

The judgment of the European Court of Justice in Anagnostakis

The appeal consisted of four grounds which were classified into two groups (as suggested by the Advocate-General’s opinion). The first group of arguments concerned the procedure in which the Commission made its Decision. The appellant challenged the finding of the General Court that the contested decision satisfied the Commission’s requirement to give reasons under Article 296 TFEU. The second group concerned the substance of the Decision: the appellant complained that the General Court misinterpreted Article 122 TFEU, Article 136(1) TFEU, and rules of international law in finding that the Commission’s assessment of Article 4(2)(b) of the ECI Regulation was correct.

The Commission’s obligation to give reasons

According to the appellant, the General Court’s assessment of the Commission’s duty to state reasons was faulty. The General Court wrongly held that the Commission’s mere reference to Article 4(2)(b) of the ECI Regulation in its Communication was a sufficient reason for the refusal of the proposed ECI. Simply stating that an ECI proposal was refused on the basis of Article 4(2)(b) of the ECI Regulation did not actually explain why the Commission manifestly lacked the competence to register the proposal.

The ECJ’s assessment of this ground of review is clear and consistent with the case law on Article 296 TFEU, specifically expressed in the context of the ECI in Article 4(3) of the ECI Regulation. The Court started by referring to Article 11(4) TEU (i.e. the legal basis of the ECI together with Article 24 TFEU), characterising the ECI as one of the instruments related to ‘the right of citizens to participate in the democratic life of the Union,’ (para 24) stipulated in Article 10(3) TFEU. The Court referred to well-established case law on Article 296 TFEU, according to which an EU institution’s statement of reasons must be assessed by reference to the circumstances of the specific case, taking into consideration the wording of the statement as well as the context and all the legal rules governing the matter in question (para 29). It stressed that the purpose of the duty to give reasons is to enable the person concerned to understand why the decision was taken, and to enable the competent Court to exercise its powers of review.

The Court then went on to consider the General Court’s finding that the Commission had complied with its obligation to state reasons (paras 31-43).The main message of the Court here was that a more detailed statement of reasons by the Commission would only be required if the ECI proposal itself was more detailed. The brevity of the proposed ECI, as well as the general reference made to Articles 119-144 TFEU and the lack of an explanation of the link between those Articles and the content of the proposal, justified the brevity of the contested Decision.

In light of the format of the proposed Initiative, the Commission was entitled to assess the proposal predominantly on the basis of Article 136(1) TFEU (a general power to adopt legislation relating to EMU), which was the least irrelevant Article on which the proposed ECI could have relied. Moreover, there is no obligation on the Commission to justify its assessment of all 26 proposed legal bases or to explain why any other provision of the TFEU was irrelevant. In its assessment, the Court took into account the fact that the General Court was eventually able to review the substance of the Commission’s decision, which, as mentioned above, is one of the underlying objectives of imposing on the EU Institutions a duty to give reasons in the first place (para 40).

In line with the General Court ruling in Minority Safepack, the ECJ in Anagnostakis supported the view that that the Commission would have to publish a more detailed statement of reasons only if the organisers had given more detailed information on the connection between the recommended legal bases and the content of the proposed ECI (para 37). Future ECI organisers should therefore be mindful of the fact that the format of a proposed ECI itself – including the details in the text of the proposal and the Annexes attached to it – is a determining factor of the extent of the Commission’s obligation to give reasons for rejecting a proposed Initiative. This approach might refuel concerns regarding the ability of grassroots organisers to put together detailed explanations of the suitable legal bases for their proposals, not least when these proposals have to do with matters that are as complicated as the EMU.

On the substance of the case

With regard to the substance of the case, the appellant argued that the Commission should have registered the proposed Initiative on the basis of Articles 122, 136(1) TFEU, and rules of international law. The latter argument, which was examined last, was the one most swiftly rejected by the Court: a principle of international law cannot be a legal basis for an initiative by the Commission. According to Article 5(1) and 5(2) TEU, the Commission can only act within the limits of the competences conferred upon it by the Treaties, and the existence of a principle of international law ‘would not suffice as a basis for a legislative initiative’ (see paras 95-103).

Interestingly, before delving into the substance of the matter, the Court considered the scope of judicial review that it could carry out in the case at hand. It clarified that a review of the merits of the General Court’s decision can only be made on the basis of the information provided at the time of the request for the Initiative’s registration. As such, the Court would not take into account any clarifications made by the appellant in the appeal at hand. After this preliminary observation, the ECJ examined the appellant’s arguments concerning Articles 122 and 136(1) TFEU.

The Court first examined whether Article 122 TFEU could have been an appropriate legal basis for the proposed ECI. It reiterated that Article 122(1) TFEU allows the Council to decide, ‘in a spirit of solidarity between Member States’, upon measures appropriate to the economic situation, especially if the Member State is facing severe difficulties in the supply of certain products in the area of energy. It confirmed the finding of the General Court in first instance, which had cited Pringle, that Article 122(1) TFEU ‘does not constitute an appropriate legal basis for possible financial assistance from the Union to Member States who are experiencing, or are threatened by severe financing issues’ (para 69). According to the Court, it did not matter that Pringle concerned the European Stability Mechanism, which was not the focus of the proposed ECI; the point remained that Article 122(1) TFEU does not apply to measures aiming to ease a Member State of its financial difficulties (para 70).

Subsequently, the ECJ also dismissed the appellant’s argument that, contrary to the General Court’s decision, Article 122(2) TFEU could be an appropriate legal basis for the ECI. The provision allows the Council to authorise financial assistance from the EU to a Member State which is experiencing severe difficulties or a serious threat of severe difficulties caused by natural disasters or exceptional circumstances beyond its control. Once again, the ECJ referred to the case of Pringle where it had ruled that Article 122(2) TFEU cannot be used as the basis for the establishment of a general and permanent mechanism of non-repayment of debt (para 75). Since the ECI proposal suggested the deletion of debts owed by the Member States to both the EU and to public and private, natural or legal persons, it could not fall within the meaning of Article 122(2) TFEU, which concerns only financial assistance provided by the EU and not by the other involved persons (paras 76 and 77).

Finally, the ECJ confirmed the finding of the General Court that Article 136(1) TFEU cannot be used as a legal basis for the establishment of the principle of the state of necessity in EU law. According to the Court, the adoption of a measure such as the one suggested by the proposed Initiative cannot be seen as ‘economic policy guidance’ as envisaged by Article 136(1)(b) TFEU. To the contrary, the mechanism proposed by the ECI would replace the free will of contracting parties by allowing for the unilateral writing-off of sovereign debt (paras 90-91).

Overall, it is notable that the ECJ dismissed a number of the applicant’s arguments under each ground of appeal because of the limited scope of review in the context of the case at hand. On appeal, the ECJ can only review the findings of law on the case put forward by the parties in the case before the General Court. As such, a number of the arguments put forward by the appellant were not assessed on their merits, leaving a number of questions unanswered by the Court in this occasion. The first question is whether a Member State facing severe financing difficulties can invoke the so-called ‘state of necessity’ to receive debt relief not unilaterally, but subject to conditionality laid down by the Commission (paras 71-73). The second question is whether the Initiative could be adopted on the basis of Article 136(3) TFEU in conjunction with Article 352 TFEU (the ‘residual powers’ clause). Besides the procedural point concerning the inability of the ECJ to rule on the above two questions on appeal, one might also wonder whether the ECI-case of Anagnostakis would have been an appropriate occasion for the ECJ to make any bold declarations on the issue of a Member State’s debt relief.

The third question left open was whether the Commission should have partially registered the proposed Initiative only to the extent that the proposal suggested the relief of the debt owed by a Member State to the Union. The ECJ did not examine whether the Commission should have registered this interpretation of the proposal. As a more general observation, we should note that the procedural question of whether partial registration by the Commission is possible has now become redundant. Earlier this year, the Commission partially registered the Minority SafePack ECI while, as we will see below, the Commission’s Proposal for a New ECI Regulation specifically refers to the possibility for the Commission to allow partial registration of a proposed Initiative.

Partial Registration of an ECI under the Commission’s Proposal for a New ECI Regulation

Five days after the ECJ’s decision in Anagnostakis, the Commission published its ‘Proposal for a Regulation of the European Parliament and of the Council on the European Citizens’ Initiative’, which suggests the adoption of a New ECI Regulation to replace Regulation 211/2011. In the proposed ‘New ECI Regulation’, the legal admissibility test has been moved from Article 4 to Article 6. The newly suggested provision retains the essence of the current procedure: organisers may only start collecting signatures supporting their ECI after they have submitted their request through the register (Article 6(2)), and the Commission has checked that the proposal satisfies certain legal and procedural criteria (Article 6(3) and (4)) and has registered the proposal (Article 6(1)).

Under the New ECI Regulation, Articles 6(3)(d) and (e) maintain the two legal criteria of the current ECI Regulation: a proposed Initiative will not be registered if it is manifestly abusive, frivolous or vexatious, or if it is manifestly contrary to the values of the EU (see Article 4(2)(c) and (d) of the current ECI Regulation). Perhaps the most notable changes are included in Articles 6(3)(c) and Article 6(4) of the New ECI Regulation compared with the current Article 4(2)(b) of the ECI Regulation. Article 6(3)(c) states that the Commission shall register a proposed initiative if ‘none of the parts of the initiative manifestly falls outside the framework of the Commission’s powers to submit a proposal for a legal act of the Union for the purpose of implementing the Treaties’. This Article should be read in conjunction with Article 6(4), which allows for the partial registration of an ECI by the Commission.

To put it simply (or, at least, as simply as possible), if the Commission considers that only parts of a proposal fall within its competence to propose a legal act, it has to send the proposal back to the organisers within one month, together with the reasons behind its assessment. The organisers then have the possibility – and the responsibility – to change and resubmit, to maintain, or to withdraw their initial proposal. It is not very clear why organisers might want to maintain a rejected proposal, which in all likelihood will simply be rejected again by the Commission. In case the organisers decide to change their proposal, however, they would have the responsibility of submitting the necessary amendments to the Commission. After receiving the amendments, the Commission would have one month to assess the new information and to either register, partially register, or reject the ECI (Article 6(4)).

Partial registration of an ECI would thus be formalised in the sense that the Commission would have to check if ‘a substantial part of the initiative including its main objectives’ does not manifestly fall outside the framework of the Commission’s powers to submit a proposal for a legal act. The proposed Regulation does not define what is to be considered ‘a substantial part’ of a proposed Initiative. Not only that, but the proposal shifts the burden on the organisers to re-consider their initiative and re-submit to the Commission, instead of obliging the Commission to specify which parts of the initial ECI proposal it can maintain for the purposes of registration. It will be interesting to see how the European Parliament will react to this, and the rest of the changes to the ECI legal framework proposed by the Commission in the New ECI Regulation, especially since MEPs have been advocating for a more user-friendly ECI in their contributions to the review of the current ECI Regulation.   

Photo credit: CNBC

The European Fiscal Board’s first report and the future of the EU’s fiscal framework

Paul Dermine (PhD candidate in EU institutional law, Maastricht University) and Diane Fromage (Assistant Professor of European Law, Faculty of Law, Maastricht University)

EU Fiscal Governance in the post-crisis era: The start of the reflection period and the European Fiscal Board’s first report

Recent events suggest that the Eurozone may soon be entering a new phase of its short but already tumultuous life. As the dust of the sovereign debt crisis starts settling, and the continent slowly returns to growth, winds of change are blowing across the zone, and EMU reform is back on the agenda and hence ardently debated at EU and Member States level. The context is thus ripe to critically reflect on the economic governance system the crisis has brought about, and on the actions carried out by the EU institutions and the Member States within that setting.

This post offers to do just that with regard to fiscal governance. As is well known, the crisis precipitated a substantial upgrade of the rules making up the European fiscal discipline, and an unprecedented strengthening of the surveillance paradigm in the field of budgetary affairs. Since it entered into force, this new normative catalogue introduced mainly by the Six-Pack and the Two-Pack reforms, as well as its main enforcer, i.e. the European Commission, have attracted a great deal of criticism (from the European Central Bank (ECB), the International Monetary Fund and some Member States).

The last blow came recently, from the newly established European Fiscal Board (EFB), which did not wait long before hitting hard. Indeed, the EFB’s creation was first announced in the June 2015 Five Presidents report. The EFB was to ‘coordinate and complement the national fiscal councils that have been set up in the context of the EU Directive on budgetary frameworks. It would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal governance framework. […Furthermore, s]uch a European Fiscal Board should lead to better compliance with the common fiscal rules, a more informed public debate, and stronger coordination of national fiscal policies.’ Its Chair – the Dane Niels Thygesen (a former member of the Delors Committee) – and its four members were designated at the end of 2016 when it hence started to function.

In its first annual report ever, published on 15 November, the EFB presents a mixed picture of the current regulatory framework, and the Commission’s action as its guardian. It focuses on three issues: an evaluation of the implementation of the EU's fiscal framework, a review and assessment of the fiscal stance for the euro area as a whole, and the identification of best practices in the functioning of national fiscal councils. It concludes with some suggestions on the future evolution of the EU’s fiscal framework.

In performing its evaluation, the EFB in fact underlines three characteristics of the current fiscal governance framework that will guide our analysis: its complexity, its persistent asymmetry and the important discretion left to the Commission in the application of the rules in place. It furthermore analyses the possibility of centralized fiscal stabilization within the Euro area.

This report constitutes a welcome opportunity to explore some of the main challenges the EU fiscal governance currently faces, and to suggest potential reform avenues.

Such endeavour is all the more timely as the reincorporation of the Fiscal Compact into EU law and the review of the Six-Pack and Two-Pack reforms will constitute key priorities of the upcoming December EMU package of the Commission. Such political momentum will certainly offer broader opportunities to further enhance and streamline the Stability and Growth Pact (SGP), and the other instruments making up EU fiscal governance.

Background to the EFB’s first report

Before proceeding with an analysis of the EFB’s first report, a few reminders are in order. As is well known, the crisis precipitated a fundamental overhaul of EU fiscal governance. On the one hand, the procedural framework for fiscal surveillance and coordination was substantially strengthened, most notably by increasing the scope and intensity of the oversight exercised by the EU on national public finances. On the other hand, the very substance of the fiscal rules Member States are subject to was tightened and further expanded.

In a nutshell, the fiscal targets are now defined more strictly, requiring stronger yearly adjustment efforts from the Member States. If the deficit remains the central criterion of the EU fiscal discipline regime, the debt criterion has been further operationalized, and an expenditure benchmark was added. The reliance on structural rather than nominal indicators has been further generalized. These developments show the clear intent of the EU to exercise close and continuous scrutiny over all aspects of national budgets, in order to enhance their overall sustainability.

However, conscious of the need to accommodate a range of contingencies, and eager to preserve a certain room for flexibility, the Six-Pack reform has also multiplied the escape clauses entitling Member States to derogate from their budgetary obligations under certain circumstances (i.a. structural reforms implementation, severe economic downturn).

The overpowering complexity of EU fiscal governance

Certainly, a major shortcoming of this new normative body is its overwhelming complexity. In the post-crisis era, EU fiscal discipline consists of a dense web of detailed rules and sub-rules governing public debt, deficit and expenditure. Those rules display a high level of prescription and specificity, and yet, are tempered by an equally complex array of general escape clauses and potential loci for flexibility and derogation. Further increasing the systemic intricacy of the EMU fiscal discipline regime, the rules are spread over different EU regulations and directives, partially replicated in international treaties and national laws (which do not always fully overlap).

Against that background, it is proven that national authorities struggle to understand the exact rules they are to abide to, and the margin of manoeuvre they still enjoy under the current framework. Such lack of clarity also undermines transparency with regard to the rules’ ‘indirect’ addressees, namely the general public and the markets, and may in the long run harm the efficiency of public oversight and market mechanisms as enforcement channels of fiscal discipline in the EMU.

Quite obviously, there is a strong need for simplification. Even the European Commission seems to acknowledge that. Too many rules, too many operational targets do not favor compliance, monitoring, enforcement and overall intelligibility, thereby undermining the legitimacy of the EU’s actions. In that regard, interesting proposals for reform are currently on the table. Correctly positing that the ultimate aim of the EU fiscal regime is the preservation of debt sustainability, IMF officials and, although to a lesser extent, the EFB consider that the system would gain in readability and overall efficiency if it were to revolve around one fiscal anchor (the debt ratio instead of headline deficit) and one operational target (possibly the ‘fiscal effort’ variable). In a similar fashion, a substantial streamlining of the existing escape clauses would also appear necessary.

The structural asymmetry of EU fiscal discipline

Another important issue inherent to the current regime is its structural asymmetry. From the outset, the SGP was designed as a tool to correct excessive deficit and debt levels and tame profligate States. Its rules and procedures are thus exclusively driven by that objective, and the crisis further strengthened this focus. Conversely, the rules do not contemplate that States may be too frugal. Under the SGP, surplus equals balance, and surplus countries are under no parallel duty to bring their fiscal position back to equilibrium. As an asymmetric construct, the SGP is one-sided, and toothless when it comes to dealing with too ‘virtuous’ countries.

This has proven particularly problematic over the last few years, as the Commission was seeking to achieve a positive fiscal stance for the Euro area, and sought to enjoin the few Member States accumulating large budgetary surpluses (such as Germany, Luxembourg or the Netherlands) to engage in mildly expansionary policies by using the available fiscal space and boosting public investment. Under the current regime, such injunctions are at best wishful thinking, and lack any kind of legal support in the texts.

In our view, such asymmetry ought to be corrected, especially at a time when Europe heavily suffers from an investment backlog. Does this mean that an ‘Excessive Surplus Procedure’ should be established? This would probably be a step too far. But if the achievement of budgetary equilibrium is to be the ultimate rationale of the SGP, its provisions should be amended so that when appropriate, fiscal expansion too can be commanded.

How complexity and flexibility empower the European Commission

The current regime’s inherent complexity and flexibility, combined with the conceptual indeterminacy of some of its founding concepts (such as that of the output gap), have also created significant room for administrative discretion, which the Commission has been very eager to exploit. It is indeed impressive to note that at any key stage of the surveillance procedure organized by the SGP (either under its preventive or corrective arm), the Commission enjoys discretion and needs to exercise judgement.

Under a supposedly rules-based system, this appears to be problematic (to some extent at least), and obviously comes at the expense of the predictability, even-handedness and efficiency of the entire regime. The main risk is that certain choices of the Commission may no longer be economically motivated, but founded on political or ad hoc considerations that may run counter to the economic rationale underlying the EMU fiscal framework. In that regard, one may for example mention the very generous decision of the Commission that Italy was eligible to the ‘structural reforms’ escape clause, or its lenient stance in the framework of the Excessive Deficit Procedure against France, which was never stepped up despite the clear insufficiency of the French consolidation efforts ('Because it is France' was the main justification expressly advanced by Juncker).

The surprising decision of the Commission in the summer 2016 not to impose sanctions (even symbolic) on Spain and Portugal for failing to take corrective action in the framework of their EDP, also shows that discretion may come at the expense of enforcement and, ultimately, of compliance. This notwithstanding, it is clear that a system of smart rules cannot do without a dose of flexibility and discretion. In the future, the focus should therefore not be on trying to erase the loci for administrative judgement, but on making sure that such judgement is primarily driven by an economic, non-political rationale.

This might however prove difficult as the Commission (also) needs to ensure that its actions remain legitimate in the eyes of the citizenry in addition to guaranteeing the EU’s fiscal stability and it arguably has to take account of the fact that its decisions to impose fines on non-complying Member States can only be overcome by qualified majority in the Council. Simplifying the normative corpus should nevertheless help in pursuing this objective of economically-based decisions. The Commission should also be more transparent on its methodologies, and consistent in their application. On a different note, the risk of biased, political application of the SGP by the Commission primarily comes from its current hybrid nature: “between an independent executive agency and a political government”, as the EFB rightly puts it (p. 63).

Such risk may be mitigated by a stronger reliance on economic advice independent of short-term political considerations. Where this input should come from remains to be seen. Quite naturally, the EFB has already offered its services. On the face of it, the EFB’s role is significantly different from that of national fiscal councils since it is not bound to take an active role in the implementation of the EU fiscal framework; rather it has to evaluate the Commission’s actions in this regard.

By contrast, even if national councils in most cases do not issue decisions binding on their governments, they have to produce or endorse macroeconomic previsions, they declare the activation of the automatic correction mechanism etc. In its evaluation, the EFB offers to endorse responsibilities closer to that of national councils.

Finally, in an attempt to further reduce discretion, EMU fiscal discipline could gain in consistency, foreseeability and congruence if it were to rely on smarter enforcement mechanisms by means of financial sanctions. Financial sanctions have shown all their limits in the past. In our view, macroeconomic conditionality, i.e. linking access to EU funds to (an almost) compliance with the fiscal rules of the SGP, could be the way to go. It is already used under the current multiannual financial framework, although in a much limited way. The pattern could be generalized under the next framework.

Towards a Fiscal Union?

Next to the issues of complexity, asymmetry and discretion visible in the EU fiscal framework, the question of centralized fiscal stabilization also deserves attention. The Eurocrisis has brought out in the open the founding insufficiencies of the rules-based paradigm, and the necessity to transcend such approach by endowing the supranational level (the EU or the Eurozone) with a fiscal capacity of its own is now clearer than ever.

This shift from negative to positive fiscal integration could take the form of unemployment insurance or investment protection, with the exemption of investments from the golden rule or not. The introduction of a rainy-day fund – also envisaged by the Commission – could also be a possibility. In our view, such a fund could appear to be a valuable option since it would function on the basis of accumulated resources regularly paid by Member States which would have a direct incentive to follow SGP rules. To this type of fund or an unemployment insurance the EFB however favors the protection of investment, which admittedly should be guaranteed too; perhaps it is also the least bold shift towards an unpopular Fiscal/Transfer Union.

Another possibility could be the introduction of an EU budget. Although the EFB acknowledges that this debate falls outside of its remit, it provides its opinion ‘as economists involved in the analysis of public finance more generally’ (p. 67), thereby arguably affirming its standing in the more global EU financial area. The form this budget should take – whether as a dedicated euro area budget (as recently suggested by President Macron) or as a dedicated budget euro area budget line in the EU budget (as envisaged by the European Commission) – is left open; in the absence of a dedicated euro-area parliamentary arena, perhaps the latter option is preferable to avoid further increasing the European democratic gap.

Beyond this, such a move would significantly go beyond the sole fiscal stabilization and adopt a broader stance on fiscal policy. This move, which would in fact represent the return to a perspective adopted at previous stages of the European integration process, would indeed be particularly welcome as it would (eventually) provide remedy to some of the shortcomings of the current fiscal policy design.

What does this report tell us?

This report is, in our view, important for at least two reasons. First, it bears a valuable assessment of the current EU fiscal framework as implemented by the Commission at a time when reflections on the future of the Eurozone architecture are high on the EU agenda. Second, it clears up certain doubts that could have existed when the EFB was first established, in particular as to its capacity to provide a truly independent assessment of the Commission’s actions. Indeed, concerning the latter point, a certain degree of uncertainty existed in light of the close ties between the EFB and the Commission, as well as in light of the absence of the EP’s involvement.

Furthermore, the EFB’s ability to act as an authoritative institution was not a given since it was established as a completely new institution that hence had to first prove its reliability (and independence). The content of the first report analysed here appears to indicate that the EFB is likely to surpass both hurdles successfully, at least as long as it is chaired by the prominent and respected expert Niels Thygesen.

Concerning the future of the EU fiscal framework, it certainly provides a useful and timely assessment. It both highlights the weaknesses in the current fiscal framework and in its enforcement by the Commission and makes a valuable contribution to the debate on its reform; this contribution is all the more valuable as it stems from the EU institution tasked with performing this assessment and not from the ECB or the IMF as had been the case thus far. We will now have to wait until the beginning of December to see if and how these proposals have been picked up by the Commission.

Barnard & Peers: chapter 19

Photo credit: Supertrader 

The draft UK/EU renegotiation deal: is it 'legally binding and irreversible'?

Steve Peers

The draft deal on renegotiation of the UK’s EU membership has already caused great controversy: both from those (mostly in the UK) who think it does not go far enough, and those (mostly in the rest of the EU) who think it goes too far in revising EU law to satisfy the objections of one Member State. These issues are mainly substantive, and I have addressed some of them in an earlier post about the immigration aspects of the draft deal. I’ll write later about the remaining substantive issues, although I will touch on some in this blog post. There’s already an analysis of the proposed ‘red card’ for national parliaments by Katarzyna Granat here.

Yet in addition to concerns about the substance of the deal, there are doubts about its legal nature. In particular, is the deal ‘legally binding and irreversible’, as David Cameron had pledged? The answer is complicated, because there are several different parts of the deal, taking different legal forms. For each part, the legal status depends on several different factors: when the text would be adopted; who would have to approve it; whether the EU courts have power to overturn it, and whether they are likely to do so; and whether the text could be repealed or amended in future. (I am assuming throughout that by ‘irreversible’, David Cameron meant irreversible without the UK’s consent).

This blog post answers that question, looking first at the legal form of the agreement. Next, I suggest ways in which the draft deal could be made more legally secure. Then I examine, based on prior experience, whether the EU can be ‘trusted’ to implement the draft deal. Finally, I provide, in one table, my assessment indication of the extent to which each of the parts of the draft deal are ‘legally binding and irreversible’, based on the factors mentioned above.

Legal form of the main deal

The draft deal takes the form of six draft legal texts: a Decision of the EU Member States’ Heads of State and Government (the ‘draft Decision’); a Statement of the Heads of State and Government (which consists of a draft Council Decision); a Declaration by the European Council: and three declarations by the Commission. Implicitly, it also includes three planned EU legislative proposals, all dealing with the free movement of EU citizens (the emergency brake on benefits, EU citizens’ non-EU family members and export of child benefit), which are referred to in these texts. The UK government is also likely to table some domestic legislation linked to the renegotiation deal: I consider that prospect briefly (and propose some further national laws which the UK might consider) below.

The basic legal form of the deal, and even some of the proposed text, corresponds with suggestions I made back in May 2014, as supplemented in May 2015 and June 2015. However, the text falls short in some respects of what I suggested there; that’s a substantive issues, so more on that in a later blog post. I’ve integrated the main relevant points from those previous posts into this one, for the reader’s convenience.

One important point before we continue: while the title of the deal refers to the UK only, none of the actual text of the deal applies solely to the UK. So it would apply to all Member States. That means it’s possible, for instance, that a proposal which the UK supports could be stymied by other Member States’ national parliaments (via the Council), using the proposed new ‘red card’. It is possible, however, that the UK would be the only Member State aiming to implement some parts of the proposed deal, in particular the ‘emergency brake’ on benefits; and of course some of the existing opt-outs referred to in the draft deal only apply to the UK and one or two other Member States.

Let’s begin with the easiest parts of the draft deal: the planned EU legislation. We know the legal effect of EU legislation, once it’s adopted: it’s binding and directly applicable (in the case of the two planned Regulations), or binding as to the result to be achieved, leaving national authorities the choice of form and methods (in the case of the planned Directive). (See the definitions of EU legislation set out in Article 288 TFEU). The more difficult question here is the process. Can it be guaranteed that the proposals will: (a) be made; (b) be adopted; (c) not be struck down by the EU Court of Justice (CJEU); and (d) not revoked?

It’s up to the Commission to make proposals. The draft Decision of Member States can’t bind the Commission (more on that below), but the draft deal includes two declarations by the Commission, announcing its intention to make these proposals. For those proposals to be adopted, they must be approved by the Council (by a qualified majority) and the European Parliament (by a majority of the vote, under most variants of the EU legislative process). Again, the draft Decision of Member States can’t bind the Council or the European Parliament. But the Council is made up of Member States’ ministers, and in the draft deal the Member States commit themselves to supporting two of these three proposals (on child benefit and the emergency brake). It’s odd that there’s no parallel commitment as regards the third proposal (on EU citizens’ non-EU family members), but this may be a drafting oversight. The timing of these measures depends on how soon they would be adopted, although the Commission declares that it will table them after a ‘Remain’ vote.

The deal foresees that the law creating an ‘emergency brake’ for EU workers’ in-work benefits would subsequently have to be implemented following a UK request to use it. This would need a proposal from the Commission and a vote by the Council (by qualified majority). There would be no role for the EP at that stage. A draft Commission declaration states that the Commission is willing to make this implementing proposal; there is no commitment from the Member States to support it. Again, this might possibly be a drafting oversight. The timing would follow the adoption of the legislation on this topic: it would likely take at least one month for the UK’s request to be approved. 

So the real question is whether to trust the Commission and Council (ie the Member States); although it’s also notable that the Member States haven’t committed themselves to support all aspects of the draft deal in this area, but only some of it. I’ll return to that question of trust below, as regards the deal in general. But it doesn’t even arise as regards the European Parliament (EP) or the CJEU, as they are not bound by the deal. It remains to be seen whether the EP will object to some or all of the legislative plans (this might become clearer closer to the referendum date). The position of the CJEU would only be clear if a legal challenge reached it. That would most likely follow from a challenge by an individual to the implementation of the new legislation, after it’s adopted, via the national courts. So it would be some years away. I made an initial assessment of the validity of the planned changes in the separate post on free movement issues; I have summarised my views in the table below.

Leaving aside the question of Court challenges, could the legislation be revoked or amended, after it was adopted? In principle, that is possible, using the same legislative procedure: proposal from the Commission, qualified majority in the Council, and support from the EP. So the UK could not veto this taking place. But implicitly the Commission’s commitment to make these proposals, and Member States’ commitment to support at least two of them, suggest this is not going to happen. Again, this comes back to a question of trust. 

The draft deal also refers to Commission plans to issue ‘guidance’ on aspects of EU free movement law. This concerns part of the rules on EU citizens’ non-EU family members (part of those rules would be covered by a new law). There would also be ‘guidance’ on the issue of criminality of EU citizens. For the latter point, the Commission’s declaration states that it will ‘examine the threshold’ relating to expulsion of criminal EU citizens when the EU citizens’ Directive is revised in future. This is too imprecise to regard as a commitment.

Next, the draft Council decision on Eurozone governance. This measure can be adopted by the Council itself, as part of its powers to govern its own activity. It does not need to be proposed by the Commission, or agreed by the European Parliament. It is similar to an existing Council decision, which provides for delays in the vote if a sufficient number of Member States have qualms about them. Protocol 9 to the Treaties says that any changes to such rules must be discussed by consensus; arguably that means that the Decision could not be amended or repealed without the UK’s consent. Technically the draft Decision should take the form of an amendment to the existing Decision, to make sure that Protocol 9 applies to it too. Since the draft Decision would not amend the rules of the Treaty on the adoption of legislation, but only provide for a delayed vote, it seems very unlikely that the CJEU would annul it.

In fact, it’s not even clear who would challenge it: the Commission and Member States would support it as part of the deal; there seems little reason why an individual would challenge it in the national courts; and it would be hard for an individual to find a procedural route to challenge it in the courts anyway (the CJEU has ruled that procedural rules of the Council don’t give rise to individual rights). That only leaves the European Parliament, and this Decision doesn’t appear to be at the top of their concerns about the draft deal. Finally, as for timing, the intention in the draft deal is to adopt the Decision once a ‘Remain’ vote was notified, with no further action necessary. The draft deal calls for a possible Treaty amendment in future on this point. 

Finally, the main part of the deal: the draft Decision of Heads of State and Government. It takes the form of five sections, dealing first of all with the UK’s four main negotiating objectives: the Eurozone (section A); competitiveness (section B); sovereignty (section C); and EU free movement (section D). Section E includes rules on dispute settlement and entry into force.

First of all, it should be noted that the draft Decision is not EU law as such; it’s international law. It’s often described as a proposed act of the European Council, which is the EU institution consisting of Heads of State and Government. But that’s simply not correct: it’s a proposed act of the Heads of State and Government as such, not the European Council (or any other EU institution). That distinction might sound like hair-splitting to non-lawyers, but it has practical legal consequences.

While the draft Decision is not described as a treaty, it could be regarded as a ‘treaty in simplified form’ (see the broad definition of a treaty in Article 2(1)(a) of the Vienna Convention on the Law of Treaties). Certainly the intention is to register it as an international treaty (see Articles 77-80 of that Convention). This form of legal act is not new to the EU: it was used in 1992, to encourage Danes to ratify the Maastricht Treaty, and in 2008, to encourage Irish people to ratify the Lisbon Treaty. That’s why I predicted that it would be used again in this case.

What are the distinctions between this draft Decision and EU law? First of all, while the draft Decision would be binding if adopted (as confirmed by the draft conclusions of the European Council), since binding effect inherently follows from its status as a treaty, it would be binding under international law, not EU law. Secondly, the draft Decision would not as such change EU law, although other elements of the overall deal would: the planned legislation on free movement issues, and the Council Decision on Eurozone issues. The draft Decision also contains rules on the application of EU law in practice (namely, Member States’ voting in Council after a ‘red card’ is issued by national parliaments) and a commitment to amend the Treaties in future, as regards the Eurozone governance and ‘ever closer union’ issues. (The latter commitment is in square brackets, indicating that it is still a topic of discussion).  

Indeed, the draft Decision could not change EU law as such, without following the formal procedures to that effect. I have discussed the issue of amending EU secondary law above, but the same is true of EU primary law (the Treaties). The prior Decisions did not change the EU Treaties, and they could not, because the CJEU had ruled that the Treaties could only be amended using the procedure set out within them, in the Defrenne II judgment. Like the prior decisions, the draft Decision specifies that it does not amend EU as such, but interprets it.

However, the draft Decision can include legal obligations for Member States as a matter of international law, as long as this does not conflict with EU law. In the event of any conflict, the primacy of EU law means that the latter takes precedence over the Decision. But is there any conflict? This is a substantive question, and in any event where the draft deal calls for EU secondary law measures to be adopted (the free movement legislation, the Eurozone Decision) the real question is whether those measures would themselves breach the Treaties if adopted. I will examine whether there is any conflict with the Treaties as regards competitiveness and sovereignty in a subsequent post, but I will comment on one here: the commitment of Member States to block Council decision-making if a ‘red card’ is pulled by national parliaments, on the condition that national parliaments’ concerns are not addressed.

Andrew Duff has argued that this breaches EU law, because it infringes the powers of the European Parliament in decision-making. In my view, this is clearly incorrect. A decision by the Council to stop discussing proposed EU legislation does not alter the Parliament’s role. It’s always open to the Council to stop discussing proposed legislation if there is insufficient interest in a proposal or for any other reason, and it’s not rare for it to do so. Every year, the Commission withdraws proposals because it has given up hope that the Council will ever agree to them (for the most recent such decision, see here). The EP can block proposed legislation too, where the ‘ordinary legislative procedure’ applies; it just does so less frequently than the Council.

A subtler argument is that this clause in the Decision in effect amends the Treaty (and so is therefore inapplicable due to the conflict with EU law) because it introduces a new voting rule in the Council without amending the Treaty to that effect. It’s more problematic than the new rule on delaying Council voting as regards Eurozone issues, since that latter rule doesn’t block the adoption of a proposal, and follows an existing secondary law precedent. However, as with a comparable clause in the ‘fiscal compact’ treaty, an agreement by Member States to coordinate their voting in Council does not amend the Treaties, whether it takes the form of an informal agreement (as it more often does) or a formal treaty to that effect. Even if this rule did breach EU law, how could the primacy of EU law be enforced in this context anyway? By a national court, or the CJEU, telling a Member State to vote a way it didn’t want to vote in the Council? This would be an unprecedented incursion into the relationship between national governments and national parliaments, which the Treaties recognise (in the Protocol on national parliaments) is a matter for national law alone to regulate.

As for the Treaty amendment process, it’s correct to say (as Andrew Duff does) that that the Treaty gives a role to the Commission and EP. But let’s not overstate that role: neither of them can block Treaty amendments, in most cases. The only exception is Treaty amendments which solely concern more majority voting, or more powers for the EP. Yes, the EP can block those Treaty amendments; but that’s about as likely as the Pope opening an abortion clinic.

Otherwise, the EP’s sole power is to insist that there has to be a fully-fledged ‘Convention’, with delegates from the EU institutions, national parliaments and national governments, to discuss proposed Treaty amendments. But the EP can’t set the agenda for the Convention, or determine its outcome. Anyway, that outcome is not binding upon the Member States, which then hold an Inter-Governmental Conference to negotiate the final text – which the EP cannot reject. In short, the most the EP can do is to force everyone to hold more meetings.

What would actually happen, if a ‘Convention’ is established? The last Convention, in 2002-3, had a broad agenda, and in practice the EP was able to steer it toward a highly integrationist conclusion. But any Convention convened in (say) 2017 would now include a lot more national parliamentarians critical of the EU, from every perspective. They might well want to drive the Convention towards a stronger version of the proposed ‘red card’, as well as repatriation of powers from the EU. Anyway, the wording of the Treaty suggests that the agenda of the Convention is limited to the issues originally tabled for Treaty amendment.

So the real impediment to Treaty amendments is not at the EU level. Rather, it’s the risk of rejection in national parliaments (and occasionally referendums), with a further long-stop risk of rejection by national constitutional courts. It’s impossible to guess at this point what would happen to the Treaty amendments foreseen by the draft Decision at national level. So there is no legal certainty that those Treaty amendments would definitely be approved.

On the other hand, the draft Decision itself does not need national parliamentary approval, at least as a matter of EU law (whether some Member States’ law might require it is a separate question). Nor does it need any sort of approval from any of the EU’s institutions – although the planned legislation referred to in the Decision does, of course, need those institutions’ involvement. Since it’s not part of EU law, the validity of the draft Decision could not be challenged directly before the CJEU, although it is possible that a national court could ask whether national implementation of EU based on the draft Decision was in conflict with EU law.

As for the timing, the intention is to adopt this draft Decision before the referendum, and then it would come into force automatically as soon as a ‘Remain’ vote (if there is one) was notified. The Decision would be irreversible in the sense that the UK government would have to consent to amend it or repeal it; this is explicitly confirmed by the draft European Council conclusions. There is no provision for a Member State to denounce it, or any other indication that it’s possible to do so; therefore it is subject to the general rule in Article 56 of the Vienna Convention that a treaty cannot be denounced in the absence of a clause to that effect.

The distinction between the draft Decision and EU law does mean that there is a gap in the Decision’s enforceability. Section E refers to bringing a dispute between Member States about the application of the Decision before the European Council. But unlike the fiscal compact Treaty, there is no provision on bringing a dispute before the CJEU, which could then impose fines. So despite the binding nature of the draft Decision, there would not be a clear mechanism for making it stick. This brings us back to the issue of trust, discussed further below.

Finally, some commentators on the previous blog posts raised the question of whether Heads of State and Government could still act outside the framework of the EU Treaties, given that the Treaty of Lisbon upgraded the status of the EU institution in which they meet – the European Council. In my view, that change in EU law did not transfer the capacity of Heads of State and Government to act to the European Council, except where the Treaty amendments did that expressly (for instance, as regards appointments to the European Central Bank). This follows from the principle of ‘conferred powers’ set out in the Treaties: in the absence of any power for the European Council to adopt anything like the draft Decision, it can’t adopt it.

How can the draft deal be made more legally secure?

Some comments on the draft renegotiation deal expressed doubt that it would go ahead. There are several possibilities for increasing the likelihood that it would do so.

As regards the draft legislation, the Commission could agree to propose its draft comments before the referendum, or at least publish drafts of its planned proposals informally for comment. The European Parliament could vote in principle on whether it would be prepared to agree to legislation as described in the draft deal. The draft deal could commit to making Treaty amendments on more issues, particularly the ‘red card’ clause and the planned legislation which is most vulnerable to legal challenge: the ‘emergency brake’ on migrants’ benefits. The Council Decision on Eurozone governance could be adopted before the referendum already, with the proviso that it comes into force automatically once a 'Remain' vote (if there is one) is notified. As noted above, it should take the form of an amendment to the existing Council decision on voting, to ensure that Protocol 9 to the Treaties applies to it. 

As regards planned Treaty amendments, the potential text of the planned new amendments could be drawn up in advance, although their approval would be dependent upon the EU Treaty amendment process. Again, the European Parliament might indicate in advance whether it would insist on a ‘Convention’ being held or not. Finally, as regards the issue of ‘competitiveness’, the Commission could draw up a list of legislation that it plans to propose or repeal – although that’s more about being more precise than legally secure, as any proposals for new legislation (or repeal or amendment of existing law) would have to go through the EU legislative process.

Can the EU be trusted?

As noted already, the EU has agreed draft Decisions like this one twice before, as regards Ireland and Denmark. It promised a Treaty amendment to Ireland, and delivered it in the form of a protocol several years later. It didn’t expressly promise a Treaty amendment to Denmark, but delivered one anyway, as part of the Treaty of Amsterdam (it’s since been amended). It’s sometimes suggested that the EU tricked Denmark because the CJEU later ignored the Danish opt-out of EU citizenship. But this is a myth: the fact is that Denmark never opted out of EU citizenship. The 1992 Decision on Denmark simply contained clarifications relating to the meaning of EU citizenship (see Section A of that decision), not any form of opt-out.

Another Treaty amendment (in the form of a protocol), relating to the legal effect of the EU Charter of Fundamental Rights, was promised to the Czech Republic if it ratified the Treaty of Lisbon. In this case, there was no Decision of Member States’ Heads of State and Government, but the draft Protocol and the promise were set out in conclusions of the European Council. The Protocol  was subsequently formally proposed, but it was not pursued after a new Czech government withdrew the previous government’s request. It’s possible that the Czech government decision was influenced by the European Parliament, which had voted against the draft Protocol. But as noted above, the EP does not have a veto over Treaty amendments: indeed, even after the EP's objection, the Council recommended that the Treaty amendment process get underway. 

The most the EP can do to stop Treaty amendments is to demand that a 'Convention' be established to discuss them. But remember: the Convention process does not give the EP any kind of veto over a Treaty amendment either. It’s merely an obligation to hold meetings. Ultimately a subsequent Inter-Governmental Conference decides what the final text of those Treaty amendments will be. I sympathise with anyone who rolls their eyes at the thought of attending meetings. But if the Czech government had really wanted to insist upon the adoption of its Protocol, it would have got it in the end.

For those who really don’t trust the EU to deliver on the renegotiation package, there’s one further option to consider. But that brings me neatly to the issue of domestic legal changes in the UK.

Domestic UK law

In his Chatham House speech last year, David Cameron raised the prospect of new UK legislation to limit the effect of the EU Charter of Fundamental Rights, and to safeguard UK sovereignty. I commented on his plans at the time, although it was only possible to make a preliminary assessment in the absence of a text. According to press reports, he is committed to going ahead with these changes. Again, there’s no point commenting further until there is a draft text.

Instead I have two suggestions for further domestic law changes. The first is a substantive point, which I’ll elaborate upon in a later blog post. Currently the European Communities Act is the legal basis for the adoption of secondary UK legislation on the implementation of EU law. But these measures often go beyond the minimum legal requirements of EU law (a process known as ‘gold-plating’); and some object to regulating any more than EU law strictly requires.

In my view, the Act should simply be amended to prevent ‘gold-plating’ taking place at all. The EU should not be getting the blame (or, from the opposing point of view, the credit) for regulation that it does not require Member States to adopt. If the UK government wishes to adopt more regulation than the EU requires, let it table a Bill for a new Act of Parliament, or use the secondary legislative powers conferred by a different Act of Parliament, to do that.

Secondly, can the UK take any unilateral action to ensure that the EU keeps its promises? Obviously, the UK can’t pass a law commanding other Member States to give effect to the renegotiation deal. What it can do is state what its reaction will be if they don’t. Any new Act of Parliament addressing the renegotiation deal could therefore state that the UK government will report regularly on the implementation of the deal. If the key aspects of the deal are not in fact implemented for any reason, and there is no prospect that they will be, it would, as I’ve argued before, be reasonable to argue for another referendum.

These two suggestions – or some variation thereof – might well appeal to those Conservative politicians who are torn between supporting the ‘Remain’ side and appealing to the Eurosceptic wing of their party. It’s the closest they can come to having their cake and eating it too.

Overview: is the draft deal legally secure?

The following table lists the binding elements of the draft deal and summarises how binding they are from various perspectives. This assessment is based on the assumption that the draft of February 2, 2016 would be adopted as it stands; it might have to be updated if that draft is amended before adoption.

Decision of Heads of State and Government (in general)

Binding: in international law

In force: after Remain vote notified

Further approval needed: No, unless national law requires parliamentary approval in some States

CJEU vulnerability: Zero; although CJEU might disagree with some interpretations of EU law

Reversible without UK consent: No

Commitment to amend treaty

Binding: in international law

In force: after Remain vote notified

Further approval needed: Yes, from national parliaments and possibly electorates; Commission, European Parliament have non-binding role in Treaty revision

CJEU vulnerability: Zero; although challenges under national constitutions are possible

Reversible without UK consent: No

Commitment to apply ‘red card’

Binding: in international law

In force: after Remain vote notified

Further approval needed: No

CJEU vulnerability: Low

Reversible without UK consent: No

Council Decision on voting on financial issues

Binding: in EU law

In force: after adoption, on date that Remain vote is notified

Further approval needed: Council has to adopt; no role for anyone else

CJEU vulnerability: low

Reversible without UK consent: No (arguably)

Legislation on free movement issues (3 measures)

Binding: in EU law

In force: after proposals tabled and adopted

Further approval needed: Yes. Commission proposals (political commitment to make them); Council approval (political commitment from Member States to support 2 proposals); European Parliament (position unknown)

CJEU vulnerability: Low-medium for 2 proposals (family members, child benefit); High for emergency brake

Reversible without UK consent: Yes

Photo credit: www.ukrep.be

Barnard & Peers: chapter 2, chapter 3

The beginning of the end for the Euro? EU Law constraints on leaving EMU or defaulting on debts

 

Steve Peers

After a couple of years without any (apparent) crisis, the future of Economic and Monetary Union (EMU) is threatened again, following the decision to call snap Greek elections in January. What would be the consequences if the anti-austerity party Syriza becomes the government?

First of all, such an outcome is not yet certain. As Open Europe’s analysis points out, Syriza has only a modest lead in the polls, and even if it becomes the largest party, it may well fall short of having a majority of seats, in which case it would have to form a coalition with another party.

Secondly, it’s necessary to realise that Syriza has, in principle, relatively modest ambitions. Its policy is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. Even in previous elections, it sought to default on the debt, rather than leave the EU or EMU.

Having said that, it is possible that Syriza might decide to threaten more decisive action if renegotiation does not go well. Or that party’s more radical elements might take charge.  Or, in the view of some (see this Washington Post commentary), Greece might be forced out of the euro by other Member States, particularly Germany.

While the main issues arising from this situation are political and economic, there are also legal constraints that cannot be overlooked. Some key measures taken to save the euro in recent years were litigated before national courts (particularly in Germany and Ireland), as well as in the CJEU, notably the Pringle case (concerning the treaty establishing the European Stabilisation Mechanism) and the pending Gauweiler case (discussed here), concerning the European Central Bank policy of buying government bonds. The Advocate-General’s opinion in the latter case is due in mid-January – in the midst of the Greek election campaign.

Let’s start with the most radical outcome. Every Member State has an option to leave the EU, set out in Article 50 TEU. It would be unwise to invoke that provision unless a Member State genuinely wants to leave (see my earlier blog post on that provision). Conversely, however, it’s entirely impossible to force a Member State out of the EU against its will. The most that the other Member States can do is to suspend its membership in the event of a ‘serious and persistent breach’ of EU values, in particular human rights and democracy (Article 7 TEU).

What about departure from EMU? The Treaties contain detailed rules on signing up to the euro, which apply to every Member State except Denmark and the UK. Those countries have special protocols giving them an opt-out from the obligation to join EMU that applies to all other Member States. But there are no explicit rules whatsoever on a Member State leaving the euro, either of its own volition or unwillingly, at the behest of other Member States.  There’s an obvious reason for this: the drafters of the Maastricht Treaty wanted to ensure that monetary union went ahead, and express rules on leaving EMU would have destabilised it from the outset. Put simply, legally speaking, Greece can’t jump or be pushed from the single currency.

But other currency unions have fallen apart in history, despite any legal prohibitions that may have existed against it. So it’s important to consider also the practical constraints: it’s not realistic to imagine forcing Greece to leave or to stay in EMU against its will, short of invading and occupying the country. How would Greece be forced out exactly? By printing drachmas in Frankfurt, dropping them from the air over Greece and hoping that Greeks use them?

In the event that Greece did choose to leave EMU in practice, EU law would have to be amended (probably with retroactive effect) to regulate the position. Although there are no express provisions on this issue, arguably Article 352 TFEU (the default power to regulate issues not expressly mentioned in the Treaties) could be used. This would require a unanimous vote of all Member States: it wouldn’t be possible to use the EU’s ‘enhanced cooperation’ rules (allowing a group of Member States to go ahead without the others), since those rules can’t be used where an issue falls within the scope of the EU’s exclusive competence, and the single currency falls within the scope of the exclusive competence over monetary policy. If Article 352 was not legally possible (someone might bring a successful legal challenge if it was used, or one or more Member States might have purely legal objections), it would be necessary to amend the Treaties.

The least radical outcome is that Greece’s debt and austerity obligations are simply renegotiated. But there are legal constraints here too. Most significantly, Article 136(3) TFEU states that any financial assistance must be subject to ‘strict conditionality’, consistent with the CJEU ruling in Pringle. The CJEU also made clear in that judgment that the ‘no-bailout’ rule in the EU Treaties (Article 125 TFEU) allowed Member States to offer each other financial assistance on the condition that it took the form of loans, rather than a direct assumption of Greek government debt by other Member States. Moreover, the CJEU pointed out, the ESM Treaty required that in the event of non-payment, the loans would remain payable, and had to be charged an appropriate level of interest.

So it’s not possible for Member States to drop all conditionality as regards loans to Greece, to forgive debt as such or to loan money interest-free. But it is open in principle to reduce the stringency of the conditions somewhat, to reduce the interest rates payable and to lengthen the repayment period – although there is always the risk that some litigant will try to convince a national court or the CJEU that this is going too far. Moreover, the rules in the EU Treaties only bind EU institutions and Member States, not private parties, third States or international organisations (although it might be argued that Member States are constrained as members of the IMF not to violate the no-bailout rule indirectly). So any renegotiation or default as regards such creditors is not subject to EU law rules in principle, although of course other legal rules might be applicable.  

Whether such fairly modest renegotiation would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government, remains to be seen. The greater impact may be longer-term, in the event that a Podemos-led government comes to power in Spain, or that new or current governments in other Member States which have been bailed out demand a similar renegotiation.

Finally, it should be recalled that renegotiation of loans might not be the only possibility to help out Greece. For example, arguably the Treaties do not rule out a form of (supplementary) unemployment insurance system as between Eurozone Member States, since it would not take the form of paying off another State’s debts as such. Admittedly, such a system would provide indirect financial support to another State, since it would reduce costs which that Member State might otherwise have. But the same might be said of loaning money to that Member State, at interest rates far lower than it would be offered on the free market, via means of the ESM Treaty – and the CJEU has already found that this didn’t violate the no-bailout rule. Moreover, the previous Commission has already done a lot of preparatory work on this issue (see the fuller discussion here). Such a scheme could probably be launched either inside the EU legal framework, or outside it.  

It’s up to Greek citizens to decide if they want to vote for Syriza or not, and the EU institutions and other Member States should leave them alone to make their choice. But if Greeks do decide to vote for that party, it would be tiresome and counter-productive to react with bluster and threats. Why not take this opportunity to re-engage with the millions of EU citizens who are affected or angered by austerity, and re-orient the EU towards ending that austerity, instead of generating more of it? That’s more easily said than done, of course. But an unemployment insurance system would not only have an economic rationale (as an automatic stabiliser) but also a political one, demonstrating that the EU can assist those who have suffered from the economic downturn directly.

 

Barnard & Peers: chapter 19
Photo credit: Xendpay.com