Towards a European Monetary Fund: Comments on the Commission’s Proposal

Michael Ioannidis, Senior research fellow, Max Planck Institute for Comparative Public Law and International Law, Heidelberg.

On 6 December, the European Commission presented a package of proposals on the further integration of the Eurozone. This was the first effort of European institutions to put on paper the rules that could shape post-crisis EMU, an issue that took centre stage in European politics after Macron’s election in France and will probably receive a new impetus after the formation of the new government in Germany. The most important part in Commission’s package is the proposal to bring the European Stability Mechanism (ESM) within the EU framework. The ESM, Europe’s main financial assistance mechanism, was set up in 2012 by an international treaty between Eurozone Members. For various reasons, legal and political, it was established as an organization of public international law, outside the EU. The Commission now proposes that the Council adopts a Regulation to make the ESM “a unique legal entity under Union law”, change its name, and add few more tasks to its mandate. Annexed to the proposed Council Regulation is a Statute governing the new body that is largely (but not entirely) based on the current ESM Treaty (ESMT).

Rebranding

The proposed Regulation starts with a marketing exercise, rebranding the ESM as EMF (European Monetary Fund). The name EMF was popularised by academics at the beginning of the crisis as part of the call to establish a European assistance mechanism, a suggestion that was practically largely realized with the establishment of the ESM in 2012. The name EMF remained, however, in the agenda of policy-makers as a symbol of Europe eventually getting its own regional equivalent of the IMF – and becoming less dependent on the latter in future crises. The Commission takes on board the widespread charm of the name EMF – but this is not a choice without its problems.

The new name, having “monetary” at its centre, alludes to the monetary tasks within the EMU that the TFEU (and the CJEU in Pringle) clearly distinguishes from economic policies and ascribes exclusively to the ECB. Quite expectedly, the body with the closest name to EMF in European institutional history was the European Monetary Cooperation Fund (EMCF), established by Regulation (EEC) No 907/73 with monetary-related tasks. Even if one admits the allure of IMF’s acronym, two things need to be reminded of. First, the original name under which the IMF itself was conceived was “International Stabilization Fund” (ISF). The reason for ultimately adopting IMF instead of ISF was United Kingdom’s (and JM Keynes’) insistence that the word “stabilization” alluded to the stabilization funds of the past, used to influence currency exchange rates and connected to unpleasant British experiences of keeping the pound pegged to the international gold standard. Such connotations are not of contemporary concern.

Second, the IMF, which has access to financial resources through the central bank reserves of its members, has closer connection with proper monetary authorities than the ESM, which is financed by issuing bonds in capital markets. The establishment of the European Financial Stabilisation Mechanism (EFSM) by the EU in 2010, a body within the EU framework and very similar function with the EMF, attests to the view that the words “Stability” or “Stabilization” are accurate descriptors of the function of the future EU financial assistance mechanism. ESF (European Stability Fund) could thus be a plausible alternative to EMF.

Conditionality

The Commission rebrands the ESM to mirror the IMF’s name, but it is much more hesitant to give the new body real IMF-like teeth. There is one single concept that made the Washington-based prototype famous: conditionality. That is, the power to set and monitor the conditions under which countries can access IMF resources. In Commission’s proposal, though, conditionality is not a job for the EMF but mainly for the Commission itself.

During the crisis, the conditionality task was shared by three, and later four, institutions: the Commission, the ECB, the IMF, and, at a later stage, the ESM. The Commission’s proposal deletes all references of the ESMT on the involvement of the IMF in Eurozone conditionality, but does not give this role to the EMF. Conditionality is for the Commission to keep. According to Art. 13 of the proposed EMF Statute, conditionality is negotiated by the Commission, in liaison with the ECB, and “in cooperation with the EMF”. “Cooperation” is admittedly a very weak form of involvement, especially if it’s compared with the phrase “together with” that previously described IMF involvement in the ESMT. Moreover, MoUs shall be signed both by the Commission and the EMF. In the ESMT, in contrast, MoUs where signed by the Commission “on behalf” of the ESM. The phrase “on behalf”, establishing an agent-principal relation between Commission and the ESM, is now stricken out, meaning that the Commission becomes legally a co-owner of EMF conditionality. Finally, under the proposed EMF Statute, compliance with conditionality is being monitored solely by the Commission, in liaison with the ECB. No role is explicitly provided for the EMF in this critical phase.

The no-bailout clause and conditions for assistance

At the beginning of the crisis, when the idea of a financial assistance mechanism for Eurozone Members was first tabled, Art. 125(1) TFEU appeared to many as a critical legal obstacle. Art. 125(1) TFEU contains two sentences with two identical prohibitions. The first is directed to the EU and the second to the Member States. Both the Union and the Member States “shall not be liable for or assume the commitments” of (another) Eurozone Member State.

Considering that ESM assistance could be seen as indirectly amounting to an assumption of commitments, the Member States thought necessary in 2011 to introduce Art. 136(3) in the TFEU. According to this provision, “[t]he 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”. Drafted with the ESM in mind, Art. 136(3) TFEU only refers to the establishment of a fund by Member States and not by the EU. It thus “clarifies” only the second sentence of Art. 125(1) TFEU.

Does that mean that establishing the EMF as an EU body contravenes Art. 125(1) first sentence TFEU? The answer is no. In Pringle, the CJEU adopted an interpretation of Art. 125(1) TFEU that allows financial assistance if it is indispensable for the stability of the Eurozone and is coupled with “strict conditionality”. Although in Pringle the Court was called to interpret the second sentence of Art. 125(1) TFEU, that is directed to the Member States, the first sentence, which will be relevant for the EMF, should be read in the same way: a Fund established by the EU that meets Pringle-conditions is compatible with Art. 125(1) TFEU.

Whether the Commission’s proposal is fully Pringle-compatible, however, is not straightforward. The proposal introduces a fundamental difference to the ESMT that seems to go unnoticed in Commission’s explanations of the proposal. It refers to the objective of the EMF and the conditions for offering assistance. Currently, under Arts 3(2) and 12 ESMT, assistance is possible “if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States”. According to the Commission’s proposal, however, the EMF can provide assistance if “indispensable to safeguard the financial stability of the euro area or of its Members” (emphasis added). Deleting the phrase “as a whole” (in Art. 12) and replacing “and” with “or” (in Arts 3(2) and 12 of the proposed Statute) means that a crisis that threatens the stability of a single Member State but not the euro area as a whole can (and shall) prompt action from the EMF. This is a very important shift of focus from Eurozone to the Member States.

This change needs to be assessed in light of the judgment of the CJEU in Pringle and the spirit of Art. 136(3) TFEU. In paras 136 and 142 of Pringle, the Court follows para. 5 of the ECB Opinion on the draft amendment to Art. 136 TFEU, presenting as condition of financial assistance that such assistance is indispensable for the euro area’s stability. Moreover, Art. 136(3) TFEU, although not directly applicable to the Regulation proposal because EMF will be a Union body, expresses the same central idea: an assistance mechanism may be established with the objective to offer assistance “if indispensable to safeguard the stability of the euro area as a whole.”

Control by the Council and the European Parliament

Under the proposal, the EMF is a “unique body of EU law”, independent, and governed by its own Board of Governors and Board of Directors. In order to be compatible with the Meroni principle (the EU law principle which limits the delegation of powers), Art. 3(1) of the proposed Regulation requires that the Council is responsible for approving a series of important decisions of the EMF Board of Governors and Board of Directors. The Council approves these decisions following the qualified majority rules provided in Art. 238(3) TFEU.

This arrangement creates two complications. First, the majority required for Council approval is different from that envisaged in Art. 4 EMF Statute both in terms of the necessary thresholds and the basis for their calculation. Art. 238(3) TFEU requires 55% of the members of the Council representing the participating Member States, comprising at least 65% of the population of these States while Art. 4 EMF Statute requires 85% of voting rights that are equal to the number of share allocated to it in the authorised capital stock of the EMF. It is thus legally possible that a decision that has the support of 85% of voting rights/shares is not backed by the minimum of 11 Member States required in the Council. Second, the Council approval makes the Council, an institution of the whole of the EU, responsible (also judicially) for the decisions of the EMF, a body of the euro area.

Moreover, the proposed Regulation claims to make the EMF accountable to the European Parliament. The EMF is required to submit reports, respond to oral and written questions, and accept invitations to its Managing Director. There are two difficulties with such an accountability scheme. First, these are only reporting obligations and do not allow the Parliament any influence in the actual decision-making of the EMF. Second, the European Parliament may not be an adequate forum for EMF accountability purposes in the first place. Members of the EMF are only euro area Members, but in the European Parliament and the Council all EU Member States are being given seats, not only those that have adopted the euro. The EMF is thus made accountable to institutions with a different composition than the Members that provide for its capital.

Is Art. 352 TFEU a sufficient legal basis?

The Commission suggests as legal basis of the proposed EMF Regulation the flexibility clause of Art. 352 TFEU. Art. 352 TFEU allows the Council to adopt measures when Union action is necessary to attain one of the objectives set out in the Treaties and the Treaties have not provided the necessary powers in other provisions. The latter condition is easily met in this case. In Pringle, the CJEU ruled that the Treaties, and Articles 2(3), 5(1), 122(2), and 143(2) TFEU in particular, do not contain an appropriate legal basis for the establishment of a stability mechanism. Moreover, the objective of the EMF, namely to ensure the financial stability of the euro area, does fall within the Union objective to establish an economic and monetary union.

The critical question for the applicability of Art. 352 TFEU is whether the establishment of the EMF is also “necessary” to attain those objectives. Here, the picture gets more complicated. Since the establishment of the ESM in 2012, the Eurozone disposes of a financial assistance mechanism to assist Members in distress and to safeguard Eurozone stability. That might mean that the establishment of the EMF by means of a Regulation is not any more necessary. In order to satisfy Art. 352 TFEU, what needs to pass the necessity test is not the existence of an assistance fund – such a fund already exists; it is rather the integration of the fund in the EU framework that the Commission must prove to be necessary. This is a more difficult test for the EMF proposal.

A final issue with regard to Art. 352 TFEU has to do with the extension of Union competences. In its Opinion 2/94, the CJEU has ruled that Art 352 TFEU “cannot serve as a basis for widening the scope of [Union] powers beyond the general framework created by the provisions of the Treaty as a whole and, in particular, by those that define the tasks and the activities of the [Union].” The question in this context is whether a future EMF – a Union body – that employs “strict conditionality” to its funding programmes goes beyond the allocation of powers the Union, which in the field of economic policy has simply coordinating competences. The Eurozone experience shows that this is possible. The macroeconomic conditions that have been tied to financial-assistance packages since the beginning of the crisis seem to go beyond coordination in intensity and beyond EU competences in breadth. As long as ESM was an intergovernmental organization this did not pose such critical competences question – although it has been raised with regard to the Two Pack reforms. This critical question, which goes directly into the question of the extent to which the Treaties allow a real economic Union, will need to be revisited if the EMF plans succeed.

Barnard & Peers: chapter 19

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Bailouts, Borrowed Institutions, and Judicial Review: Ledra Advertising

Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective 

One of the features of the response to the euro area crisis has been the resort to intergovernmental arrangements that largely avoid judicial and parliamentary control at the EU level. The paradigmatic example has been the European Stability Mechanism (ESM), created by the euro area countries in order to provide financial assistance to countries in difficulties, subject to conditionality. The ESM was created through the adoption of an international agreement, the ESM Treaty; it is an intergovernmental mechanism created outside the framework of the EU, but with significant links to it. Most importantly, the ESM ‘borrows’ two EU institutions, namely the Commission and the European Central Bank (ECB), in order to carry out its functions. (Those two bodies, along with the International Monetary Fund, constitute the so-called ‘Troika’ which oversees the controversial bail-out processes).

The nature of the ESM and the way it operates raises important questions regarding judicial protection. As mentioned above, ESM financial assistance is granted after strict conditions have been negotiated and agreed in a Memorandum of Understanding. These conditions typically require the Member State in receipt of assistance to adopt ‘austerity’ reforms that have an impact on its citizens—understandably, these citizens may wish to challenge the validity of these conditions, often questioning their compliance with the EU Charter of Fundamental Rights.

In Pringle, the Court stated that Member States were not within the scope of application of the Charter of Fundamental Rights when creating the ESM, or presumably when acting within its framework. This meant that their actions could not be reviewed for accordance with the Charter (although they can still be reviewed in national courts for compliance with purely national law, or in the European Court of Human Rights for compliance with that treaty). This, however, left open the question of whether, or in what form, the Charter applied to the EU institutions—the Commission and the ECB—when operating under the ESM. This is the question that the Court of Justice had to answer in the Cyprus bailout cases (Ledra Advertising and Mallis).

Cyprus wrote to the Eurogroup in 2012 to request financial assistance, and it was in receipt of ESM assistance from 2013 until 2016. The country had to recapitalize its biggest bank and wind down its second. The Memorandum of Understanding stipulated that bondholders and depositors would bear part of the cost. As a result, the applicants suffered substantial financial losses and turned to the EU courts: first to the General Court, and then on appeal to the Court of Justice. They were challenging the validity of the Memorandum of Understanding (Ledra Advertising), as well as a Eurogroup statement that referred to the conditions attached to the bailout (Mallis); they also asked for damages. In their view, the involvement of EU institutions—the Commission and the ECB—in the adoption of these measures meant that it should be possible for individuals to challenge their validity at the EU level; they also argued that these institutions’ involvement should trigger the EU’s non-contractual liability.

The General Court dismissed all complaints as inadmissible. It decided that neither the Memorandum of Understanding nor the Eurogroup statement could be the subject of an action for annulment; the former because it is not a measure adopted by an EU institution, the latter because it is not intended to produce legal effects with respect to third parties. It considered that the involvement of the Commission and the ECB in the adoption of these measures was not enough to attribute authorship to them, or to trigger the non-contractual liability of the Union.

The Court of Justice agreed, in part, with the General Court: neither the Eurogroup statement (Mallis) nor the Memorandum of Understanding (Ledra Advertising) can be the object of an action for annulment. The Court insisted again on its finding in Pringle that ESM acts fall outside the scope of EU law; the involvement of the Commission and the ECB does not change this, and is not enough to attribute authorship of these acts to them for the purposes of judicial review.

Yet the Court goes on to reveal a twist in Ledra Advertising: even if they are not its authors, the involvement of the Commission and the ECB in the adoption of an ESM Memorandum of Understanding may be unlawful, and thus able to trigger the non-contractual (damages) liability of the EU. The Commission, in particular, retains its role as ‘guardian of the Treaties’ when acting within the ESM framework. As a result, the Commission should not sign an ESM act if it has any suspicions as to its accordance with EU law, including the Charter.

The Court repeated the usual rules for the EU institutions to incur non-contractual liability: (a) they must have acted unlawfully, (b) damage must have occurred, and (c) there must be a causal link between the unlawful act and the damage. Not just any unlawful act gives rise to damages liability: there must be ‘a sufficiently serious breach of a rule of law intended to confer rights on individuals’. While the right to property enshrined in the Charter was a ‘rule of law intended to confer rights on individuals’, that right is not absolute: Article 52 of the Charter allows interference with some Charter rights. Applying that provision, the Court came to the conclusion that the measures contained in the Memorandum did not constitute a disproportionate and intolerable interference with the substance of the applicants’ right to property, given ‘the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of [greater] financial losses’.

So individuals can challenge the EU institutions’ bailout actions by means of an action for damages (non-contractual liability), but not by means of an annulment action. It is useful to remember that the rules on access to the EU courts as regards those two types of remedy are quite different. The standing rules are more liberal for damages actions: it’s sufficient to allege that damages have been suffered as a result of an unlawful act by the EU, whereas it’s much harder to obtain standing to bring annulment actions. The time limits are more liberal too: individuals have five years to bring damages cases, but only two months to bring actions for annulment. On the other hand, the threshold to win cases is much higher for damages cases: any unlawfulness by the EU institutions leads to annulment of their actions, but only particularly serious illegality gives rise to damages liability.

In any case, we know from the Court’s ruling that breaches of at least some Charter provisions within the ESM framework could potentially give rise to damages liability. In the anti-austerity context, it should be noted that social security and many social welfare claims fall within the scope of the right to property, according to the case law of the European Court of Human Rights. In the case at stake, the Court did not discuss the proportionality of the interference with the applicant’s rights at much—or any—length, but it is clear that future applicants will face an uphill struggle.

On the whole, Ledra Advertising is a welcome change from other cases concerning measures adopted as a result of a bailout, where the Court’s approach had been to deny the existence of any link to EU law. Indeed, it seems unavoidable that the EU should bear the appropriate degree of responsibility when allowing its EU institutions to operate within the ESM framework. This is not to say that it will be easy for individuals to be awarded damages; as this case illustrates, the threshold is extremely high. Moreover, while a significant aspect of the role of the EU institutions within the ESM has been clarified, questions remain concerning the judicial and democratic accountability of this mechanism. Overall, however, Ledra Advertising is a step in the right direction.

Barnard and Peers: chapter 19, chapter 8

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