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

Photo credit: www.bibliotecapleyades.net

EU Referendum Briefing 1: Can the UK control the EU’s future if it stays a member?

Steve Peers

During the EU referendum campaign, a number of arguments have been made that staying in the EU is risky, because of possible future developments of the EU itself. While there will always be someone somewhere who says they would like to see an EU army, or some development related to the single currency, such an expression of opinion is meaningless by itself.  The fundamental issue is whether the UK could control such developments – either by vetoing them or opting out.

So what’s the worst that can happen? In this post, I’ll examine in turn the main alleged risks to staying in the EU. As we’ll see, in every single case the UK has control, either by an opt-out or a veto. In other words, none of these things can happen without the British government’s consent. Nearly all of them would also need our Parliament’s consent. And the large majority – all the fundamental possible changes to the EU that many are concerned about – would actually need the consent of the British public in another referendum. (Anyway, there's nothing to stop the UK holding another referendum on EU membership in future, if it wanted to).

All of these safeguards for UK control of further developments of the EU exist in the current law of the EU – as I will show in detail. None of them are first created by the renegotiation of EU membership agreed this February.

I’ll look at seven issues where the UK has control over future EU developments:

a) defence;

b) transfers of power;

c) new Member States, including Turkey;

d) taxation;

e) non-EU immigration, asylum and criminal law;

f) the single currency; and

g) the EU budget, including the UK rebate.

There's also an earlier blog post on the controversial issue of the planned EU/US trade deal (TTIP) and the NHS. 

a)      EU Defence and foreign policy

The UK has control over EU defence and foreign policy measures because they are in principle taken by unanimous vote, with only limited exceptions. On foreign policy in general, Article 31 TEU says:

Decisions under this Chapter shall be taken by the European Council and the Council acting unanimously, except where this Chapter provides otherwise.

The exceptions are where there has been a prior act or request of EU Presidents and Prime Ministers (who act by consensus), or where the EU is implementing a prior act already agreed by unanimity, or where the EU appoints a ‘special representative’. However, there is a kind of ‘emergency brake’ in all these cases:

If a member of the Council [ie a Member State government] declares that, for vital and stated reasons of national policy, it intends to oppose the adoption of a decision to be taken by qualified majority, a vote shall not be taken.

Also the majority voting ‘shall not apply to decisions having military or defence implications’. It’s also possible to apply majority voting to funding issues, but again there’s a military and defence exception (Article 41 TEU), and also there’s an exception for a Member State which chose to abstain on a proposal. The bottom line is that the UK is in control of whether it has to contribute to EU foreign policy funding.

So whether EU foreign policy relating to Ukraine or Russia (for instance) is a good idea or not, it has not been imposed on the UK government. Rather the government is in control, because it could have vetoed it. This means that if EU Member States can’t agree on an issue, there is no EU foreign policy on that issue, and they do as they like – as in the case of the Iraq War, for instance.

Some have raised the issue of the UK’s permanent seat on the United Nations Security Council. In fact Article 34(2) TEU refers to Member  States’ seats on the Security Council, not to any EU seat. The UK has control here, because it could veto any EU decision that required it to give up its Security Council seat, as part of its veto over any foreign policy matters. It’s suggested that the European Parliament wants that to happen, but the European Parliament has no role in EU foreign policy: Article 36 TEU says that it’s only consulted.

Anyway, a change to the UK’s Security Council veto  could only happen by means of a change to the UN Charter, and the UK has control over that: a veto, according to Article 108 of the Charter:

Amendments to the present Charter shall come into force for all Members of the United Nations when they have been adopted by a vote of two thirds of the members of the General Assembly and ratified in accordance with their respective constitutional processes by two thirds of the Members of the United Nations, including all the permanent members of the Security Council.

As for defence, can there be an EU army? Article 42(2) TEU says:

2. The common security and defence policy shall include the progressive framing of a common Union defence policy. This will lead to a common defence, when the European Council, acting unanimously, so decides. It shall in that case recommend to the Member States the adoption of such a decision in accordance with their respective constitutional requirements.

So the UK has control over any possible ‘common defence’, by means of its veto. And there’s more: the ‘constitutional requirements’ that would apply in the UK are not only parliamentary approval, but also a referendum, according to the European Union Act 2011. In general this law sets out a ‘referendum lock’ on further transfers of power to the EU, putting the British public in control over any future transfers. I’ll refer to this law again several times, since it sets many other limits on the development of the EU in future. It also requires a referendum before any British veto over foreign policy or defence is given up. 

b) Treaty amendments and transfers of power

It’s sometimes suggested that there might be future transfers of power from Member States to the EU, as part of the developing single currency project (perhaps following the so-called ‘Five Presidents Report’ on this issue) or for some other reason. This is sometimes presented as a 'superstate', or as an inevitable outcome of the EU's 'ever closer union' clause. However, the UK has control over these developments. First of all, the UK has an opt-out from the single currency, as discussed below. Secondly, it also has a veto over future Treaty amendments.

There are several ways to amend the EU Treaties, as set out in Article 48 TEU. They have two things in common: (a) the UK government has a veto over all of them (which it used in 2011, for instance); and (b) the British Parliament would have to approve each of them, either by voting in favour or deciding not to vote against.

But there’s more. The European Union Act 2011, first mentioned above, also gives control to the British public over any significant Treaty amendment, by means of a referendum. This would apply where the UK would drop nearly any veto. It would also apply to other transfers of powers to the EU from the UK, defined in detail as including:

a)      ‘the extension of the objectives of the EU’;

b)      any ‘conferring’ or ‘extension’ of any EU competences, including over ‘the co-ordination of economic and employment policies’ (an issue in the Five Presidents’ Report); or

c)       giving any EU ‘institution or body’ any power to give orders or impose sanctions upon the UK.

  

It’s been suggested that the UK gave up a veto relating to single currency and banking issues as part of the renegotiation deal. This isn’t true, as the deal didn’t amend the Treaties and Parliament has not amended the 2011 Act.

So the control over any transfer of power from the UK to the EU is threefold: the UK government, UK Parliament and the British public.

c)       New Member States

The rules on accession of a new Member State are set out in Article 49 TEU, as follows:

Any European State which respects the values referred to in Article 2 and is committed to promoting them may apply to become a member of the Union. The European Parliament and national Parliaments shall be notified of this application. The applicant State shall address its application to the Council, which shall act unanimously after consulting the Commission and after receiving the assent of the European Parliament, which shall act by an absolute majority of its component members. The conditions of admission and the adjustments to the Treaties on which the Union is founded, which such admission entails, shall be the subject of an agreement between the Member States and the applicant State. This agreement shall be submitted for ratification by all the contracting States in accordance with their respective constitutional requirements. The conditions of eligibility agreed upon by the European Council shall be taken into account.

So the UK controls whether a new country joins the EU, by means of a veto. The ‘constitutional requirements’ are an Act of Parliament in favour.

There has been some concern about new Member States joining the EU in future, but in order to join each new State must negotiate 35 chapters of detail about EU law. In 11 years’ of negotiations, Turkey has only agreed one out of those 35 chapters. It has not even opened many of them:

Moreover, the ‘conditions of eligibility’ include human rights standards, which Turkey doesn’t now meet. Cyprus would veto Turkish membership unless there’s a deal on the future of the island. The other countries applying to join have not agreed many chapters either.

In any event, the current Member States can insist on a long waiting period before the free movement of persons fully applies to new Member States. The majority of the Member States which joined the EEC/EU after it was founded (14 out of 22) have been subject to seven-year waiting periods before full free movement of people, and longer periods could be applied in future.

The UK veto over enlargement could only be dropped by a Treaty amendment, approved by the government, parliament and public under the European Union Act 2011.

d)      Taxation

The main taxes harmonised at EU level are VAT and excise taxes. EU law sets a minimum rate for these taxes: it’s 15% for VAT, subject to exemptions. It also defines their scope. The UK has VAT exemptions on things like books, basic foodstuffs and children’s clothes.

While VAT is sometimes depicted as if it is imposed by the EU upon the UK, in fact the UK has consented to all VAT laws, since law-making in this area is subject to unanimity. The rule currently appears in Article 113 of the Treaty on the Functioning of the European Union:

The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation.

So the UK has control in this area, since it has consented to every VAT obligation and excise tax obligation set by EU law. It’s the UK’s own decision to set the rate of tax for VAT and excise taxes (taxes on alcohol, tobacco and petroleum) above the minimum level. Many people would like to see further exemptions from VAT, such as on tampons or environmental services; but it was the UK government that agreed to commit itself not to lower these rates. Actually, the UK government recently agreed to a renewal of the 15% minimum rate. In any event, the EU has recently agreed to a more flexible approach, which will allow VAT to be dropped on tampons and possibly a broader range of other products and services.

It follows from the existence of the veto that the UK has control over any future amendment to EU tax law in these areas, including any removal of any exemption, by means of its veto.

What about other taxes? There is little EU involvement in other areas of tax law. So, for instance, the UK is entirely free to set rates of personal income tax, National Insurance contributions, corporate taxation, council tax and many more. However, there is some limited EU involvement in cross-border aspects of corporate tax, such as the recent law which aims to tackle cross-border tax evasion.

The EU adopts these laws on the different legal basis of Article 115 TFEU:

Without prejudice to Article 114, the Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, issue directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market.

Again it can be seen that unanimity is the rule. So the UK has a veto. This veto is further protected by Article 114(2) TFEU, which says that the majority voting that normally applies to EU single market law does not apply to ‘fiscal provisions’.

Therefore the UK has control over any new EU tax that might possibly be proposed to fund refugee and migration costs, or upon pensions, or upon anything else. We can simply veto it.

Can these vetoes be removed? As discussed above, due to the European Union Act 2011, they can only be removed (in whole or part) if the Treaty is amended with the consent of the UK government and parliament, and the British public in a referendum.

e)      Asylum, non-EU migration and criminal law

The UK has an opt-out over EU laws on non-EU migration, criminal law and policing. This is set out in Protocol 21 to the Treaties.

As regards immigration and asylum, the UK opted out of most non-EU immigration laws, but opted in to the first phase of asylum laws from 2003-2005, using the veto which it had at the time to ensure that these laws did not require any change in UK asylum law. The only substantive EU asylum laws which the UK has opted in to since 2005 are the Dublin III Regulation (on returning asylum-seekers back to another Member State where they first entered) and the Eurodac Regulation (on fingerprinting asylum-seekers to that end). The UK opted out of recent EU laws on relocating asylum-seekers from Italy and Greece to other Member States.

The UK also has an opt-out from the Schengen system of open borders between Member States, and harmonised external border controls (see Protocols 19 and 20). This includes an opt-out from the EU laws on short-term visas (which concern stays of three months’ maximum). So the UK will not be covered by the proposed laws on waiving the short-term visa requirement for Turkish citizens, or for other countries (Ukraine, Georgia, Kosovo).

For the same reason, the UK will also not be covered by the proposed law on a European Border Guard. While this law originally provided for the border force to enter a Member State without its consent, that idea was dropped during negotiations. That would anyway not have applied to the UK; and in fact the EU court has ruled that the UK could not opt in to the EU law creating a border agency (the precursor to the proposed Border Guard law) even if it wanted to, without signing up to the whole of the Schengen system.

In the areas of criminal law and policing (which will be the subject of a separate blog post with more detail), the UK had a veto until 2009, when the Treaty of Lisbon came into force. Since that date, it has had an opt-out, which it has frequently used. In particular, it has opted out of the proposal for a European Public Prosecutor. Note that the EU’s police agency, Europol, is not a ‘federal police force’: the Treaty rules out ‘coercive powers’ for it, so it cannot arrest, question or detain people. Its main role is the analysis of police investigation data.

The abolition of the opt-outs on immigration and asylum, Schengen and criminal law would require a Treaty amendment subject to approval of the government and Parliament. The abolition of the Schengen opt-out would also require a national referendum, under the European Union Act 2011. So would participation in the European Public Prosecutor.

f) The Single Currency

The UK’s opt-out from the single currency appears in Protocol 15 to the Treaties. Point 1 reads:

1. Unless the United Kingdom notifies the Council that it intends to adopt the euro, it shall be under no obligation to do so.

This protocol does not expire at some point, as is sometimes suggested. Neither are ‘all Member States obliged to join the euro by 2020’. So the opt-out is valid for an unlimited period.

The protocol goes on to disapply the various EU law rules relating to the single currency. This has a number of implications. Due to the single currency opt-out the UK cannot be subject to austerity measures imposed by the ‘Troika’ that oversees bail-outs to Eurozone countries, since this only applies to states which adopt the single currency. Austerity policy in the UK is solely a decision made by our own government.

Furthermore the UK is exempt from some EU banking laws. Most notably it is not obliged to participate in the permanent bail-outs of Eurozone states. Only Eurozone states are involved in that, on the basis of a separate treaty. In fact the EU as such cannot adopt laws on permanent bail-outs, according to the EU court.

The UK could potentially be part of solely temporary bail-outs. But here the law was amended to provide a guarantee that the UK would get its money back in the event of any default.

g)      The EU budget – and the UK rebate

Of the money the UK in principle sends to the EU, there are two key features: a) a rebate, meaning some of that contribution is never sent at all; and b) some EU spending back in the UK. (For an overview, see here).

It’s often suggested that the rebate is not legally secure, and that the UK has no control over spending by the EU. Both suggestions are false.

The rebate is set out in the EU’s Own Resources Decision. This does not (as some suggest) have an expiry date (other Member States’ rebates will expire in 2020, but the UK rebate, and the law as a whole, will not). If the EU wants to amend this law, Article 311 TFEU applies:

The Council, acting in accordance with a special legislative procedure, shall unanimously and after consulting the European Parliament adopt a decision laying down the provisions relating to the system of own resources of the Union. In this context it may establish new categories of own resources or abolish an existing category. That decision shall not enter into force until it is approved by the Member States in accordance with their respective constitutional requirements.

It’s clear that the UK government can control the future of the rebate by means of a veto. Furthermore, so can Parliament, since the ‘constitutional requirements’ for the UK referred to mean that an Act of Parliament has to be passed for any amendment to the Own Resources Decision. These constraints have meant that the veto has stayed in place for over 30 years – although the UK government and parliament have agreed to some reduction in it over that time.

It’s clear that this rebate is not ‘conditional’, as is sometimes suggested. The UK has full control over the rebate money and can do entirely what it likes with it.

What about EU spending back in the EU? The basic rules on what the EU spends money on are set out in the law on the ‘Multi-Annual Financial Framework’. The latest such law is here. The UK does have control over the basic features of this law, because it has a veto over it, according to Article 312(2) TFEU:

2. The Council, acting in accordance with a special legislative procedure, shall adopt a regulation laying down the multiannual financial framework. The Council shall act unanimously after obtaining the consent of the European Parliament, which shall be given by a majority of its component members.

It’s also useful to put the EU budget contribution into broader perspective. It’s less than 1% of UK spending (the small red section of the graph below). So if the UK no longer paid the contribution, it would be like getting a pay increase from £400 to £404. The average taxpayer is paying 12p a day toward the EU.

Conclusion

As we have seen:

a)      The UK cannot be required to join an EU army without consent of the UK government, parliament and public;

b)      Treaty amendments require the consent of the UK government and parliament, and (if there’s any transfer of powers) the public;

c)       Accession of new Member States requires the consent of the UK government and parliament; it is a long way off for Turkey in particular and if it ever happens, will be subject to long periods of transition for workers to be admitted;

d)      The UK has a veto on tax issues; the UK government, parliament, and public would have to consent to dropping it;

e)      The UK has an opt-out from EU law on asylum, non-EU migration and criminal law; the UK government and parliament would have to consent to dropping it, and the public would have to agree to join Schengen or the European Public Prosecutor;

f)       The UK has an opt out from the single currency and other related issues, and could only join after the consent of the UK government, parliament and public;

g)      The UK has a veto over the basic EU budget revenue and spending rules, including the UK budget rebate; the veto could only be dropped with the consent of the UK government, parliament and public.

Of course, there are many other possible criticisms of the European Union. Some may be valid, and some not. But the argument that the UK government could be forced into any of the measures listed above is quite clearly false and scaremongering. All of the above possible developments are subject to the control of the UK government, and usually our Parliament and the general public besides.

Art: ‘The Scream’, Edvard Munch

The European citizens’ initiative and EU competence over Greek debt ‘haircuts’

Professor Daniel Sarmiento, Professor of EU Law at the University Complutense of Madrid*

EU competence is a touchy area of EU law. It has become very complex, together with the also intricate case-law on legal bases, which, after several decades of case-law, is not always easy to follow. After the entry into force of the Lisbon Treaty, EU competence has become a major domain for EU constitutional lawyers and it deserves very careful attention. The fact that the Treaties now include a typology of EU competences and enumerate them is a sign that many future battles in EU law will be fought in this terrain.

Furthermore, cases like Pringle, Gauweiler (discussed here) or Vodafone prove that issues of competence and legal bases are not the exclusive domain of institutional litigation, but areas that can be brought to the courts by private parties too. The Court of Justice has always been sensitive to these cases and it has dealt with them with utmost care, mostly in Grand Chamber formation.

Last week a rather surprising route for EU competence litigation came under the radar. In the case of Anagnostakis (no English version available, I’m afraid), the General Court ruled on an action of annulment brought by a private party against the decision of the Commission to reject, on the grounds of lack of competence, a European citizens’ initiative (ECI). Mr. Anagnostakis, together with more than a million supporters, brought a proposal pursuant to Article 11.4 TEU (which provides for the existence of ECIs) and Regulation 211/2011 (which sets out the detail of the ECI process), demanding that the Commission introduce in EU legislation “the principle of state of necessity, according to which, when the financial and political subsistence of a State is at stake due to its duty to comply with an odious debt, the refusal of payment is necessary and justified”. According to the promoters, the legal base of the initiative was to be found in Articles 119 TFEU and 144 TFEU.

The Commission did not seem very impressed and, pursuant to Articles 4(2)(b) and (3) of Regulation 211/2011, it refused to register the proposal, based on a lack of competence.

Mr. Anagnostakis introduced an action of annulment before the General Court, attacking the Commission’s Decision for breach of Articles 122(1) and (2) TFEU, 136(1) TFEU and rules of international law.

The General Court dismissed the action, but it did not limit itself to scrutinizing the Commission’s duty to state reasons. Instead, the Court went into some detail in order to ascertain if haircuts in government debt are not only a competence of the EU, but also in conformity with EU Law. In a rather surprising format and procedural context, the General Court dealt quite openly with one of the Union’s hottest potatoes at the time: the unsustainable Greek public debt.

It is true that the judgment is quite laconic in its reasoning, but it relies several times on Pringle and Gauweiler when interpreting Articles 122 and 136 TFEU. But no matter how laconic it may be, the judgment makes an assertion that will probably not go unnoticed when the Greek public debt becomes politically toxic again. In paragraph 58 of the judgment, the General Court states that “the adoption of a legislative act authorizing a Member State to not reimburse its debt, far from being a part of the concept of economic policy guidelines in the sense of Article 136.1.(b) TFEU […] it would have the effect of substituting the free will of the contracting parties by a legislative instrument allowing for a unilateral abandonment of public debt, which is clearly not what the provision allows” (free translation).

The assertion might be formally correct in light of the limited scope of Article 136(1)(b) TFEU, but the language of the judgment is politically explosive. Even in legal terms, one wonders if Pringle was openly precluding any kind of haircut of government debt by any means. After reading the General Court’s decision in Anagnostakis, it seems that haircuts will be mission impossible in the future, despite the circumstances, the consensus among Member States (the IMF has been explicitly positive about a future Greek haircut) and, above all, the terms and scope of the haircut.

But of course, this judgment could be just a superficial decision undertaking a superficial degree of scrutiny due to the peculiar procedural context of the case. It could be argued that highly contested issues such as the EU’s competence in the area of EMU is something should be left to the Court of Justice, but not to the General Court in the circumstances of a case like Anagnostakis. The General Court might be aware of this and thus the brief and straight-forward reasoning of the decision. However, after reading the judgment several times, the more I read it the more explosive it sounds to me.

*Reblogged from the Despite our Differences blog

Barnard & Peers: chapter 5, chapter 19

Photo credit: www.thenation.com

Can Greece be forced out of the euro? The role of the ECB in restricting funding avenues to Greece - will Target2 be next?

Ioannis Glinavos (@iGlinavos), Senior Lecturer, University of Westminster https://iglinavos.wordpress.com/

The European Central Bank (ECB) has come under harsh criticism for its support (or lack thereof) of Greece since the election of Syriza. The following comment charts the progressive tightening of funding conditions for Greece against the background of the ECB rules, and reflects on options in case an agreement is not reached to address Greece’s immediate funding needs in June 2015.

ECB stops accepting Greek government bonds as collateral

Since Greece accepted the first bailout in 2010, it has largely not been able to raise money in the markets (apart from domestic T-Bill issues). Continued support from the Troika (disbursement of bailout funds) is dependent on the successful completion of periodic reviews. As the last review was never completed successfully, Greece has not received a bailout fund payment since the summer of 2014.

The avenue through which the Greek government continued to finance its deficits in the absence of bailout disbursements was by borrowing more from its commercial banks. Indeed, although the Greek government is unable to raise long-term funding on the bond markets, it increased its borrowing by means of short-term treasury bills. The Greek government was able to borrow from its banks because those banks can borrow from the Bank of Greece (BoG) and, in turn, the BoG can borrow from the ECB so long as Greece remains in the euro. The banks themselves would be in no position to object to taking on more government debt, for political reasons and especially because sovereign default would mean that their existing holdings of government debt are written down leading ultimately to larger state ownership (a catch 22 situation for the domestic banking system). The ending of EU/IMF lending to Greece has not therefore been a binding constraint on its government budget or its foreign borrowing. It would be as if Greece had obtained ‘bailout’ lending from the loan facility or EFSF after all, causing a faster rise in Eurosystem debt, instead.

Before February 2015 and while this final assessment was being argued over, Greece did continue to finance itself via the ECB by selling bonds to its commercial banks, which then deposited those bonds as collateral with the national central banks (NCBs) in order to gain the funds (through the ECB) needed to pay for the bonds. Correspondent account balances (NCB-ECB) only pay the ECB discount rate as interest, so this is a cheap form of financing. In practice the ECB had tried to persuade NCBs to stop abuse of these accounts. The ECB had pressured Greece, Ireland, and Portugal at the beginning of the crisis to seek bilateral rescue loans and EFSF/ESM funds rather than use their banks and ECB credits to finance their deficits and rollovers. For this to work of course, state paper needs to be accepted as collateral by the ECB. Prior to the 2008 crisis, only A-rated paper was acceptable collateral. This was reduced to BBB- in October 2008 to allow for the large expansion of ESCB credit. As Greece was being threatened with a credit rating below investment grade, the ECB dropped this minimum rating requirement for Greek government in May 2010.

This ‘allowance’ for Greece ended on 4 February 2015 when the ECB’s Governing Council lifted the waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic. This suspension was in line with existing Eurosystem rules, since it were not possible to assume a successful conclusion of the programme review.

ECB rations ELA

The loss of direct access to the ECB credit line meant that the BoG had to extend its use of Emergency Liquidity Assistance (ELA) which is not subject to ECB collateral rules. Although ELA is supposed to be for short periods, there is the precedent of the Irish central bank that used it extensively. The ECB Council could order the BoG to cease ELA, but this seems unlikely given the Irish precedent. The way ELA works (the rules determining its use are extremely limited, a mere 2 page document) is by the NCB requesting it, and the ECB supplying it, unless a 2/3 majority of the governing council objects. ELA can only be provided to ‘solvent’ financial institutions and cannot be used to directly finance a state, as this would violate the No-Bailout clause in the Treaty. Further, the ECB has made it clear that the so-called Securities Market Programme portfolio of Greek bonds bought by the ECB cannot be restructured because that would be equivalent to granting an overdraft to the country and that would be contrary to Article 123 of the Treaty on the Functioning of the European Union. The ECB has continued nonetheless to support the Greek banking system via allowing incremental increases to the ELA, plugging the hole that is opening as deposits fly out in the slow motion bank run that has been in progress since elections were called at the end of 2014.

Supporting the Greek banks, and supporting Syriza through them are two different things however and the ECB has been trying to ban Greek commercial banks from buying any more government T-bills. It was reported in March 2015 that the ECB instructed Greece’s biggest banks to refrain from adding (short term) Greek government exposure. More specifically, the ECB included their recent warnings on capping Greek T-bill holdings at Greek banks in its legal framework. In March 2015, Greek banks held around €11B of T-bills, while the Greek government has a Troika-induced limit of €15B T-bill issuance (total amount outstanding). The new legal framework by the ECB would thus imply that Greek banks can’t cover this possible €4B shortfall if foreign investors don’t re-invest their maturing T-bills. The ECB already had an official cap on the amount of T-bills Greek banks can use for funding through ELA (€3.5B as of March).

This came on top of some more subtle changes, restricting the ability of Greek banks to suck liquidity out of the Eurosystem. In March the ECB also changed the rules for state-guaranteed bonds. This is another kettle of fish than the sovereign bonds (discussed above) that the ECB no longer accepts as collateral for Greece. While the ECB had prevented commercial banks from depositing sovereign bonds as collateral to borrow direct from the ECB, it continued to directly accept commercial bank bonds guaranteed by the Greek state. This is no more. The Governing Council of the ECB adopted Decision ECB/2013/6, which prevents, as of 1 March 2015, the use as collateral in Eurosystem monetary policy operations of uncovered government-guaranteed bank bonds that have been issued by the counterparty itself or an entity closely linked to that counterparty. This Decision, which aimed to ensure the equal treatment of counterparties in Eurosystem monetary policy operations (supposedly!) and simplify the relevant legal provisions, following the measures implemented on July 2012, which limited counterparties’ use of uncovered government-guaranteed bank bonds that they themselves have issued.

This little known practice (now unavailable for Greek banks) worked as follows. A commercial bank would lend money to itself by issuing a bond which it did not intend to sell. Such phantom bond was issued in order to hand it over to the European Central Bank as collateral in exchange for a cash loan. Normally, of course, the ECB would never accept such a phantom bond as collateral, as it would amount to a total circular reason for financing. It would be an assault on the meaning of collateral and a gross violation of the ECB’s rulebook. This is why the bank would take its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted the bank’s phantom bond and handed over the cash as the Greek taxpayer had, in the meantime, unknowingly provided the collateral for the bank’s loan.

Some European governments (Greece included) had launched schemes guaranteeing bonds issued by credit institutions shortly after the outbreak of the financial crisis in order to support their banking systems. Nevertheless, this market development suggests that the introduction of the eligibility of own-use government-guaranteed bonds accompanying the suspension of the minimum credit rating has also allowed a substantial fraction of these increasingly issued bonds to find their way into reverse transactions for refinancing credits with the ECB. Government guarantees are of importance because of two reasons. Firstly, government guarantees for risky assets pose a risk for taxpayers in case of bank default. Secondly, government guarantees can influence the valuation of the collateral as well as its credit rating, and thereby its refinancing conditions. In February 2009, the ECB extended the acceptance of own-use assets to all those guaranteed by governments. In principle, this made it possible to securitize assets into bonds, which are retained, thus never assessed by the market or a rating agency, and can still be used as collateral for refinancing credits due to the government guarantee. Moreover, the conditions in terms of valuation haircuts would be appealing if the rating of the guaranteeing government is higher than that of the issuer. As explained above, this facility is no longer available.

Could conflict with ECB end in expulsion from Target2?

The current conflict scenario may lead to Greece missing the bundled IMF payment at the end of June. If this is treated as a default event (this is doubtful, but possible) it may further impair the position of Greek banks. Even if the ECB does not label the Greek banking system insolvent (thus not eligible for ELA support), it will most certainly increase the haircut on GGBs, making it even more difficult for Greek banks to pledge collateral to benefit from ELA. A further deterioration in relations which leads to comprehensive default on sovereign debt (and/or Grexit) will put the ECB in a position where it will need to stop supporting the Greek banking system, and by extension the defaulting Greek government. It is difficult though to see the BoG cooperating with the ECB in bringing about the destruction of the Greek banking system.

If the ECB did prohibit ELA, depriving the BoG of any approved means of lending to its banks, the BoG would have no option (if the Government does not wish to issue its own currency) other than to defy the ECB and continue to lend anyway, given the consequence of not doing do: the closure of its banks for the want of liquidity. What could the ECB do to prevent this? The only way for the ECB to stop this indirect Eurosystem lending to the Greek government would be by ordering other NCBs to refuse further credit to the BoG, shutting the BoG out of the Target2 system. This scenario is reminiscent of the breakup of the post-USSR ruble zone. Such action however would prevent clearance of cross-border payments out of Greece and amount to the expulsion of Greece from the euro. The free flow of credit between Eurozone NCBs is an essential feature of monetary union. It is what keeps a euro in a Greek bank equal to a euro in banks elsewhere. As long as Greece remains in the euro, it cannot be excluded from Eurosystem credit, so Germany and any other euro countries that still have sound finances will keep lending, whether or not the Greek government defaults. If this is not done via an official loan facility, it will go through the Eurosystem (ECB), and it will increase (as it clearly has) if uncertainty about Greece remaining in the euro accelerates the flight of capital. The ECB cannot avoid continued lending to Greece or any other troubled country that remains in the euro. The ECB (or, more accurately, its owners, the NCBs that constitute the Eurosystem) is the lender of last resort whether it likes it or not. This creates a paradox. The ECB cannot legally expel Greece from the Eurozone, yet by shutting it out of Target2 it will de-facto create a Greek euro that will float against the old-euro creating valuation differentials. In any event, the legality of expelling Greece from Target2 would surely be challenged by Greece in the CJEU.

Some questions for Mr Draghi

The Greek government has complained that the ECB has placed a noose around Greece’s neck. It would be more accurate to say that the noose is around the government’s neck, but there are some serious questions now facing the ECB as the crisis evolves. I would like to ask Mr Draghi the following:

·         How will the ECB treat a default on IMF loans?

·         Will the ECB allow ELA to continue if Greece is rated as in default by the agencies?

·     Will ELA support be dependent on the introduction of capital controls in case of sovereign default?

·         How will the ECB react to ‘non-aligned’ actions by the BoG in case of default?

Further reading:

Ruparel, Even If Deal Is Reached With Greece, The Drama Is Just Beginning

Garber, The Mechanics of Intra Euro Capital Flight,  

Buiter, The implications of intra-euro area imbalances in credit flows

Varoufakis, How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers/

Whittaker, Eurosystem debts, Greece, and the role of banknotes

Barnard & Peers: chapter 19

Art credit: www.rollingalpha.com

Clash of the Judicial Titans: Will the Euro survive?

Steve Peers

The German Federal Constitutional Court (BVerfG) has finally sent a reference to the Court of Justice of the European Union (CJEU). Moreover, it has chosen a crucially important issue to ask questions about. This issue is the validity of the Outright Monetary Transactions (OMT) policy of the European Central Bank (ECB) – the very policy which is credited with keeping the EU’s single currency alive, perhaps single-handedly. If either of these courts rules that this policy is invalid, the very existence of the EU’s single currency could be called into question.

In a nutshell, the OMT constitutes a promise made by the ECB, back in the summer of 2012, that it would if necessary purchase the government bonds of troubled eurozone Member States on the secondary market (ie, from banks and other financial institutions which own those bonds). The purpose of the policy was to shore up confidence as regards the specific economies in question, and therefore in the single currency in general. In return, among other things, the countries concerned would have to sign up to austerity programmes. While the OMT has never actually been triggered, the mere possibility of its use appears to have calmed financial markets’ doubts about the survival of the single currency (and about the continued use of the euro by all the EU Member States which currently use it) considerably. The BVerfG’s decision to send any question to the CJEU is itself historic. It comes soon after the first references to the Court of Justice from the Spanish Constitutional Court (Melloni) and the French Constitutional Court (Case C-168/13 F, which concerned Jeremy Forrest, the British schoolteacher who ran off with one of his pupils). So all the big beasts among Europe’s constitutional courts have now engaged with the CJEU.

 However, it is clear that the BVerfG at least still does not really regard the CJEU as the king of the jungle. It asserts its intention to find that the OMT programme breaches the German constitution, depending on what the CJEU has to say. On the other hand, the CJEU has always asserted that it is the sole judge of whether an EU act is valid (going back to the judgment in Foto-Frost). Can the single currency survive this conflict between constitutional principles?

The legal issues 

The BVerfG (along with many others, particularly in Germany) doubts that the OMT programme is legal, because it constitutes economic policy (rather than monetary policy) and because it amounts to the ECB buying up eurozone governments’ debt, which is not permitted under the Treaties which the EU is founded up.

Let’s have a closer look at these arguments. First of all, is the OMT programme an economic policy? While the EU has established an economic and monetary union (EMU) among eurozone Member States, and economic and monetary policies are obviously closely related, there is nonetheless a sharp legal difference between the two policies as a matter of EU law. Monetary policy is an exclusive competence of the EU, as far as the eurozone Member States are concerned. Within the EU, the ECB is in charge of that policy.

On the other hand, economic policy is primarily a matter for Member States; the Union (primarily the Council) only coordinates such policies.While this division may not make much economic sense, any significant shift of powers over economic policy to the EU would have been impossible to agree politically, and have raised great(er) doubts about the EU’s legitimacy.

In its Pringle judgment of 2012, the CJEU ruled that the treaty establishing the European Stability Mechanism (ESM), which establishes a system for eurozone Member States to lend financial support to each other, was an act of economic policy, not monetary policy. But the CJEU did not define what ‘monetary policy’ consisted of.

The BVerfG doubts that the OMT programme is valid because it constitutes an independent economic policy of the ECB. But as the BVerfG itself notes, the Treaties provide (in Art. 127(1) TFEU) that the European System of Central Banks (which the ECB forms a key part of) ‘shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’ set out in Art. 3 TEU. Arguably the OMT programme is exactly that: support for the economic policies of Member States (including the ESM) as regards the EU’s objective of establishing and maintaining a single currency. As long as the economic conditionality linked to the OMT programme is no different from, or at least consistent with, the economic conditionality linked to the ESM and the EU rules on economic governance (ie, control of excessive deficits), then the OMT programme cannot be said to constitute a separate economic policy of the ECB.

Secondly, does the OMT programme circumvent the ban on buying government debt? Article 123 TFEU specifies that the ECB and national central banks cannot ‘purchase directly’ the ‘debt instruments’ of eurozone Member States’ governments. Obviously, the word ‘directly’ is significant; if the authors of the Treaties had wanted to ban the ECB from ever owning a government bond issued by a eurozone Member State, they would have left that word out. So it can hardly be doubted that the ECB can purchase such bonds from financial institutions, at least on a modest and non-systematic basis. 

But the BVerfG is concerned about the underlying purpose of the ban on direct purchases of government bonds: to prevent governments from being ‘propped up’ by the central bank. If all government bonds issued by Eurozone Member States were systematically snapped up by the ECB from the financial institutions which had initially bought them, the ECB would arguably be circumventing the ban on direct purchases.

The best approach to this objection is to interpret the ECB’s powers in light of its obligation to contribute to achieving the EU’s objectives, in particular the development of the single currency. In the ordinary course of events, purchasing significant numbers of eurozone government bonds directly on the secondary market might not have a strong link to the existence of the single currency. But in the current circumstances, it does. So this justifies a flexible approach to the limits which might otherwise apply to the ECB’s actions – provided that such purchases are on secondary markets, and are necessary to ensure the single currency’s survival.

The judicial politics 

The BVerfG states clearly what it expects the CJEU to do: to interpret the OMT programme in accordance with its specified constraints, otherwise it will rule that the programme is in breach of the German constitution. But the BVerfG has warned the CJEU before, and then not gone through with its threats. It has come to resemble an angry parent issuing increasingly dire threats to a naughty child – and then not following through on them. The naughty child soon realises that the threats won’t be carried out, and adapts her (mis)behaviour accordingly. 

And there is another factor at play here. When the BVerfG was asked if Germany could ratify (for instance) the Lisbon Treaty, there was a clear route to ensure that its judgment was carried out. Very simply, it could have ordered the German government not to ratify that Treaty. Similarly, in cases concerning the EU’s banana market legislation, or the interpretation of EU age discrimination rules, it could have ordered the German administration and courts not to apply the rules concerned. But it is less clear exactly what it can do to stop the actions of the ECB, which presumably would not consider itself bound by a BVerfG decision. The BVerfG refers to requiring the German government to act (unless there is a retroactive amendment of the German constitution), but exactly how that will stop the application of the OMT programme is unclear. So our naughty child in Luxembourg – and her naughty brother in Frankfurt – must know that their ostensibly strict parent probably can’t carry out this particular threat.

In that case, how will they behave? It might be expected that many of the concerns raised by the BVerfG can be addressed, but not all. In particular, it is hard to see how the OMT programme could achieve its objectives if the ECB does not have the power to buy significant number of government bonds on secondary markets. Possibly the CJEU will allow such purchases to continue, subject to certain conditions – which the BVerfG may decide are strict enough to meet its concerns. Judging from the overall tone of the latter court’s ruling, it is looking to find a way to uphold the validity of the OMT programme despite its fundamental objections.

[Update: the CJEU gave its ruling in this case in June 2016. See the analysis of the judgment here.]

Barnard & Peers: chapter 19