National parliaments and the “Five Presidents’ Report’: The long road towards the democratization of EMU

Ton van den Brink, Associate Professor, University of Utrecht

The recent ‘Five Presidents’ Report’ contains far-reaching proposals to deepen the EU’s Economic and Monetary Union (EMU), which have been analyzed here. These proposals also have far reaching consequences for national parliaments. The much needed democratization of the EMU requires national parliaments to be assigned with stronger rights than the proposed intensification of ‘dialogues’.

What is at stake for national parliaments? The report proposes to come to a ‘system of further sovereignty sharing within common institutions’ (p. 5). This system would include, inter alia, a further Europeanization of economic policy coordination, aimed at economic convergence of the Euro area. To that end, the European Semester would be restructured and national ‘Competitiveness Authorities’ would be set up in the Eurozone Member States. The proposals to establish a Fiscal Union include the creation of an advisory European Fiscal Board and a common macroeconomic stabilisation function to ‘better deal with shocks that cannot be managed at the national level alone’. This last element is similar to the tax authority proposed by German Minister Gabriel and French Minister Macron as part of their plea for a radical integration of the Eurozone. It is unclear, however, how the more long term perspective of creating a European treasury would relate to national treasuries.

There are more unclarities which make it difficult to assess how national parliaments would exactly be affected. The European Fiscal Board would, for instance, only have an advisory role. The general direction of the proposals is, however, clear. The proposals would increase control of EU institutions over national policies. Thus, a further Europeanization of economic policy making would be the result. Second, the technocratic nature of decision making would be strengthened. The further expansion of ‘rule-based cooperation’ and the mandates of the new bodies would significantly contribute thereto.

Europeanization and technocratization pose challenges for national parliaments. These are not addressed, even though the report underlines that democratic legitimacy and accountability should be the corner stones of the EMU. The proposals in this regard do not add much to the already existing ‘six-pack’ and ‘two-pack’ arrangements and in any case do not extend beyond ‘streamlining’ procedures and the strengthening of ‘dialogues’.

The answer to these challenges cannot be the European Parliament, at least not the European Parliament alone. It is true that the executive federalism that may be witnessed in the field of economic policies requires a better position for the European Parliament as well. But the European Parliament cannot substitute national parliaments in economic policy making. First, there is no real solution for the role of the European Parliament - representing citizens from 28 Member States - in decision making on measures that are limited to the Euro area. Second, a substantial part of economic policy making is country specific. This will remain so, even though the Five Presidents’ report contains proposals to strengthen the euro area wide dimension of economic policy making. National parliaments certainly qualify as the most obvious institutions to exercise democratic control over the country specific part of economic policy making in the EU. Thirdly, national parliaments’ constitutional rights are affected in a very concrete manner by the proposals. Thus, strengthening their role would also contribute to compensating that loss.

Taxation and budget rights are among the most concrete constitutional rights that are at stake for national parliaments. The right to decide on the national budget implies budget autonomy. The German constitutional court, in its decision on the constitutionality of the ESM-Treaty, ruled that: ‘Deciding on public revenue and public expenditure is a fundamental part of the ability of a constitutional state to democratically shape itself. In this context, the right to decide on the budget is a central element for shaping opinions in a democratic society’. 

Thus, the German constitution (as well as the constitutional systems of many other Member States) would not allow the national budget right to be relinquished altogether. Although the German constitutional courts accepted the possibility of – even significant – limitations to national budget autonomy, a suspension thereof for at least a considerable period of time, would be considered unconstitutional by the German constitutional court. The creation of a Macroeconomic Stability Function would need to pass this test before it could be created. What is more, the Court made it clear that it had formulated only minimum conditions and stressed the discretion of the German legislature ‘to weigh whether and to what extent, in order to preserve some discretion for democratic management and decision-making, one should enter into commitments regarding future spending behaviour and therefore – correspondingly – accept a restriction of one’s discretion for democratic management and decision-making in the present’.

Closely related (but in various constitutional systems recognized as a separate right) is the right to decide on taxation. The constitutional significance of this right, as well as its “sovereignty-sensitivity” have made it impossible thus far to come to supranational taxes. The feasibility of a Euro area wide treasury – whatever its exact form – is, thus, highly questionable.

The position of national parliaments is also at stake with regard to macroeconomic policies, which have redistributive effects. Specific national constitutional guarantees are generally lacking in this area, but a Europeanization of these policies is still particularly troublesome. This has to do with the lack of common substantive principles or rules. Unlike fiscal policies – which are ‘rule-based’, such as the 3% rule - macroeconomic policies are essentially political decisions, e.g on how labour markets and pension systems must be reformed and whether and how national investment climates must be improved.

In this light, the proposals from the Five Presidents’ report are too meagre for national parliaments to ensure effective democratic control. It has to be acknowledged that - should all of the plans indeed be realized - national parliaments would be limited in their national decision making capacities on fiscal and economic policies. This limitation of decision-making power should be compensated by adequate accountability rights. It would therefore be far from sufficient to organize plenary debates between the EP and the Commission and streamline the interaction between the Commission and national parliaments and between the European Parliament and national parliaments.

The relationship between the Commission and national parliaments should be the starting point for strengthening the position of the latter. It is one thing to get the EU Commissioner to the national parliament to discuss country-specific recommendations, but without the possibilities of sanctions this remains an empty shell. The rules that have been developed in the context of EU legislative procedures (most notably with regard to subsidiarity scrutiny) may offer inspiration here. The right to make the Commission reconsider a legislative proposal could, for instance, be applied in the context of economic and fiscal policies as well: the national parliament at issue could be empowered with the right to object to country-specific recommendations which would lead to obligation for the Commission to reconsider these. In case of the macroeconomic stabilisation function the existing mechanisms of cooperation between national parliaments in the context of subsidiarity scrutiny could offer inspiration. This could be linked to the right of assent for - a qualified majority of – national parliaments.

The exact shaping of national parliaments’ rights is, however, essentially a second order issue. To get to that issue, it first needs to be acknowledged that a genuinely democratic EMU requires national parliaments to have more at their disposal than the right to be informed and to take part in economic dialogues.

Barnard & Peers: chapter 19

Photo credit: www.clivebates.com

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Is a temporary Grexit legally possible? EMU as the Hotel California

Steve Peers

According to press reports, while today’s Eurogroup meeting, called to consider a possible new bail-out plan for Greece, was taking place, the German government was leaking a plan for a ‘temporary Grexit’. Before considering the political or economic merits of this idea, there’s an obvious question: is this legally possible? In a word: No.

It’s not legally possible simply because a permanent Grexit isn’t legally possible, and so a temporary one isn’t either. I’ll briefly recap the reasons why, based on my recent blog post. There’s no reference in the Treaties to any power of a Member State to leave EMU once it joins, or of the EU institutions to remove that Member State from EMU, whether it agrees to that or not. A Member State can leave EMU by leaving the EU, but there’s no Treaty power to throw a Member State out of the EU, or to suggest that any Member State might ever be under the obligation to leave.

This week, Andrew Duff suggestedthat it might be possible to use the existing Treaties to arrange a Grexit. In his view, the power set out in Article 140(2) TFEU to decide on a Member State’s admission to the EU is reversible. However, this view is not legally tenable. Article 140(2) is only a power to join the euro, not to leave it. This interpretation is reinforced by Article 140(3) TFEU, which refers to the ‘irrevocable’ fixing of exchange rates. Overturning a decision made to join the euro by qualified majority vote (on the basis of Article 140(2)) would not be enough; it would also be necessary to overturn the exchange rate decision made by unanimity on the basis of Article 140(3). So Greece would have to consent – even if any of this were legally possible.

Some might suggest that the CJEU would simply ignore the plain words of the Treaty and accede to political reality, as it did in the cases of Pringle(on the ESM bail-out treaty), and Gauweiler(on ECB bond-buying). But those cases concerned measures which were intended to save monetary union, and which had broad support from Member States. A forced Grexit (temporary or not) would meet neither criterion. And much as many Germans hate to admit it, there is a textual basis to the rulings in Pringle and Gauweiler: the Treaty did not expressly ban loans to Member States, and it implicitly permits the ECB to buy government bonds on the secondary markets. The argument for a forced Grexit does not even have a fig leaf to hide its obvious illegality.

Nor can the Greeks be forced out by the actions of the ECB. The Treaty ban on forced exit from EMU must logically rule out measures which have the same result in practice. And even the measures which the ECB has taken to date (never mind others which it might take in future) are highly questionable, and are already being legally challenged, as I blogged earlier today. We can’t assume that the CJEU will always back the legality of the ECB’s actions: the UK won a case against it earlier this year, and the Commission beat it in court years ago as regards the application of EU anti-fraud law.

So can anything be done legally to change the current position? As I suggested in my earlier blog post, it would be possible to amend the Treaties, or to somehow engineer proceedings that challenged the legality of Greek EMU membership from the outset, or the legality of Greek debts; or (more precariously) to use Article 352 TFEU (the residual powers clause of the Treaties) to regulate the effects of a Grexit that had already taken place de facto.

But let me offer another suggestion: it could arguably be legal to adopt a measure based on Article 352 which nominally retains Greece’s status as an EMU member, but exempts it from some of the normal rules applicable to EMU members. This has the advantage of bending rules a little without breaking them entirely. Since Article 352 requires unanimous voting, it avoids the economic and political problem with Duff’s proposal: throwing a Member State out of EMU by a qualified majority would show the world that the EU’s monetary union is very fragile indeed. Using Article 352 would ensure that Greece consents to whatever happens to it.

I won’t thrash out the details now of what this might entail. But some have pointed out that, for instance, Scotland has no official legal tender, but pounds are simply accepted as currency in practice. It might similarly be arguable that the euro would remain nominally legal tender in Greece, but some sort of parallel currency, not formally legal but accepted for certain purposes, could be introduced for a limited period.

I’m not suggesting that this is the best solution, either legally, economically or politically. In my view, the least bad solution would be a fresh bail-out deal with rather less austerity, or (since that’s not realistic) acceptance of the current Greek offer (including debt restructuring) with an independent advisory board to oversee and make suggestions for its detailed implementation. Only if that idea fails (which currently seems possible) should a more radical fall-back position be considered.

Metaphors about Greece have been done to death (and I’m afraid I’ve contributed to this myself). So let’s sum this idea up with a lyric from a famous rock song: Greece can check out of EMU any time it likes, but it can never leave.

Barnard & Peers: chapter 19

Photo credit: The Eagles

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The legal challenge to ECB restrictions on Greek bank accounts – and how you can help

Steve Peers

Many EU citizens have watched with sympathy and concern as Greek citizens have been limited to withdrawing €60 a day in the last two weeks. This restriction results from a restriction imposed by the European Central Bank (ECB) on the emergency liquidity assistance which it provides to Greek banks.  

Apart from the human impact, there are grave legal, political and economic doubts about the ECB’s action. One of the central purposes of a central bank is to function as a lender of last resort to banks – and the ECB is signally failing to do that here. Also, the ECB’s actions give the impression that it is trying to influence the Greek political debate on austerity and membership of the Eurozone – a role which is well outside the Bank’s remit. The banking restrictions obviously damage the Greek economy, and so limit its ability to pay back its creditors in future.  They have nothing to do with the Bank’s task of fighting inflation, and they undermine its broader role in supporting the EU’s economic growth. (For a fuller critique, see here (paywalled); on the legal background, see here). Arguably these restrictions – or further restrictions which the ECB might impose – could lead toward a de facto ‘Grexit’ from monetary union, which is ruled out by EU law (see my discussion here).

It’s possible to challenge the ECB’s actions via the national courts, which can refer the issue to the CJEU, such as in the recent Gauweiler case (discussed here). They can also be challenged in the EU courts, such as in the UK’s recent successful challenge (discussed here). The case law takes a broad view of what ECB acts can be challenged, except where it acts as part of the ‘Troika’ which negotiates bailout conditions, when neither the Bank nor the Commission can be challenged in the EU courts. But the ECB’s restriction of assistance to Greek banks did not fall within the scope of its role in the Troika.

National governments such as Greece can go directly to the EU courts to challenge ECB actions. Other challengers besides the EU institutions would have satisfy standing rules: ‘direct and individual concern’, or (if they are challenging a non-legislative act which does not entail implementing measures) ‘direct concern’. Arguably it would be easy for a Greek bank to satisfy those rules.

In the absence of a legal challenge from a Greek bank or the Greek government, an individual depositor has brought a legal challenge to the ECB’s recent actions before the EU General Court. You can find the full text of the claim here. The ECB might restore assistance if there is a deal in the near future, but it is still worth challenging its actions, so it cannot do this (or threaten to do it) in future.

Obviously there is a possible problem with standing, although a parallel challenge could be brought in the Greek courts. The plaintiff welcomes any advice or support – contact info@alcimos.com. Or you can leave comments on this blog post.

Barnard & Peers: chapter 19

Photo credit: www.2oceansvibe.com

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The law of Grexit: What does EU law say about leaving economic and monetary union?

Steve Peers 

A Greek referendum on whether to accept its creditors’ offer is currently scheduled for next week. It’s not clear at this point whether the Greek voters’ refusal to accept the offer would necessarily lead to Greece leaving the EU or EMU, or at least defaulting on its debts. In fact, it is not clear what would happen if Greek voters decided to accept the offer, since it was still under the process of negotiation when the referendum was announced, and may no longer be on the table at the time of the referendum.

However, since a wide range of outcomes are possible, it’s useful at this stage to look at the legal framework for departure from economic and monetary union (EMU) – and in particular whether Greece would have to leave the EU if it left the single currency. (See also my previous blog posts, before and afterthe last Greek election, and Ioannis Glinavos’ recent analysis of whether Greece could be forced out of the euro).

The starting point is that the EU 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. (I’ll say that again, more clearly, for the benefit of those who claim otherwise: there is absolutely no way that the UK can be required to sign up to the single currency. That would not change in any way if British voters decided that the UK should stay in the EU).

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 and/or the European Central Bank (ECB).  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 directly jump or be pushed from the single currency.

In practice, though, its continued existence in the single currency could be made very difficult, as Ioannis Glinavos pointed out, either by the ECB restricting or ending emergency assistance (ELA) to Greece, or by the ECB limiting or removing Greek access to payment systems. It’s possible that any such moves would be legally challenged by the Greek government, and perhaps by other litigants too. It could be argued that they are in breach of EU monetary law as such, and/or that they breach an implied rule that Member States cannot be forced out of monetary union.

But let’s imagine that some sequence of events leads to Greek departure from the official legal framework for EMU nonetheless. This could lead to the fully-fledged introduction of a national currency (the ‘New Drachma’, or somesuch). It could instead lead to some informal link with the single currency – for instance a Greek ‘version’ of the euro, or the use of the euro as Greek’s official currency in practice without participating in the legal framework of EMU. Several countries outside the EU (such as Montenegro) take the latter approach. None of these actions are legal (for a Member State) as a matter of EU law.

For that matter, the less extreme possibility of Greece defaulting on Greek debts without leaving EMU (if that were feasible in practice) is not provided for in the Treaties either. Moreover, other Member States and the EU institutions are arguably legally obliged to refuse debt relief for Greece, in accordance with the Treaties’ no bail-out rule: as the CJEU said in Pringle, this rule allows Member States to loan money to Greece in return for conditions and an appropriate rate of interest. But they cannot simply assume responsibility for Greek government debts. Forgiving those debts would have the de facto result of assuming them – although it might be possibly argued that the letter (but surely not the spirit) of EMU law would allow this as long as the Greek debts were not formally transferred to the EU institutions or Member States. It might also be argued that a Greek default on such debt would be a situation of force majeure, which could be accepted by creditors without this amounting to a breach of the no bail-out rule.

However, the no bail-out rule does not apply to the private sector, which explains the ‘haircuts’ already imposed on private banks, or to international bodies or third States. So Greece could default on its loans to the IMF without infringing the no bail-out rule (although that would surely breach some other legal rule). Thanks to the gods of irony, the IMF is the biggest supporter of Greek debt relief. And equally, without infringing that rule, Greece could refuse to pay back any loans that Putin might be foolish enough to give it.

Of course, the reason we got to this position in the first place was a series of legal breaches: Greece joined the single currency on the basis of allegedly inaccurate economic data (for the debate on that issue, see here), and was not punished (as EU law provides for) when it started to run debts and deficits well above the legal limits of EU law.

So if Greece does leave the EMU framework, and/or default on its debts in violation of EU law, is it obliged to leave the EU, as some have suggested? On the face of it, it’s certainly illegal for a Member State to leave EMU unless it also leaves the EU. But having said that, there would still be no legal obligation for Greece to leave the EU if it defaulted or left EMU.

Why is that? The main legal reason is that the Treaties have a specific legal regime on withdrawing from the EU: Article 50 TEU, as discussed in detail here. Article 50 says that a Member State ‘may decide to withdraw from the Union, in accordance with its own constitutional requirements’. This is manifestly a voluntary choice. There are no rules in the Treaty stating that a Member State ‘shall’ withdraw from the Union in any particular circumstances.

Nor is it possible to throw a Member State out. Article 7 TEU allows a Member State to be suspended for breaching key principles such as human rights, democracy and the rule of law. But there is no provision allowing a Member State to be fully expelled from the Union against its will.

So implicitly but necessarily, the Treaties rule out any expulsion from the EU and any requirement to leave it, in any circumstances.  But the Treaty drafters didn’t provide for States to leave EMU and/or default on debts either. If those States can’t be forced to leave the EU in such circumstances, what is the legal way forward?

Solutions to the tragedy

Classical Greek tragedies often ended with a ‘deus ex machina’ (‘god out of the box’). The playwright had manoeuvred the characters into an impossible situation, and the only way to resolve the plot was by the introduction of a radically new plot element – a god or goddess who could use his or her divine powers to resolve all of the problems which the characters faced. The normal rules of narrative are suspended.

In my view, this is where we stand with Greek participation in the EU’s single currency. Whether or not Greece stays in EMU, a new approach to the legal framework is necessary to try and address the Greek position.

I see four main possibilities. First of all, the Treaties could be amended to try to regulate the situation, if necessary with some degree of retroactivity. There could, for instance, be a new general power for the Eurozone States in the Council and/or the European Council to adopt measures to address the legal consequences of Greece departing EMU. Legally, this is the tidiest solution; but politically, it’s the most difficult one, since the Greek issues would get bound up with the British ones. It’s possible that the Treaty amendment process would fail due to issues related to Greece, rather than the UK – or the other way around.

Secondly, it could be argued that the implied powers of the EU (most obviously, Article 352 of the TFEU) could be used to address the situation. This is a difficult argument since the Treaty drafters considered EMU to be ‘irrevocable’. However, the CJEU has taken a generous approach to measures aimed at saving EMU that many people believed were clearly ruled out: financial assistance in Pringle, and the ECB’s bond purchasing programme in Gauweiler (discussed by Alicia Hinarejos here). It might equally take a generous approach to the legality of any measures aiming to clean up the enormous mess that a ‘Grexit’ would make.

Thirdly, some Greek law-makers have suggested that the Greek debts might be illegal, on the basis of a theory of ‘odious debts’ that violate human rights. As noted above, though, the CJEU has insisted on the conditionality of financial assistance, and it has also repeatedly refused to answer questions from national courts about the legality of those conditions. So at first sight, it looks difficult for this argument to succeed as a matter of EU law, although the Court has not ruled on this issue as such yet.

Fourthly, there’s a novel argument that I haven’t seen suggested before: Greek participation in the euro was invalid in the first place, because of the allegedly inaccurate economic statistics used at the time. The CJEU could declare in the same ruling that all of the legal commitments relating to Greek participation in EMU in the past remain legal, so as not to disturb legal certainty (there’s plenty of precedent for CJEU rulings like that). There are two possible variations here: a) if Greece is still participating in EMU, its participation must be retained for the same reasons of legal certainty; or b) if Greece has left EMU, its departure is legal because the original participation was invalid.

But in either case, a crucial exception to the ‘legal certainty’ rule can justify debt relief for Greece. It’s arguable that due to the essential illegality of the legal framework in which Greek debts were incurred, the no bail-out rule did not fully apply, leaving the creditors and Greece free to negotiate a realistic amount of debt relief. (True, the no bail-out rule does apply to non-Eurozone States too; but Greece borrowed far more than it would have done due to its illegal participation in the euro). If Greece has left the euro already, it could in future benefit from the slightly different regime for financial assistance to non-Eurozone States.

Although Greece would still be formally required to try to join the single currency in future, the EU tends not to pressure countries (like Sweden) which have no real intention of joining. Realistically, no one would pressure it to join for a very long time.

All of these solutions provide, in one way or another, that ‘it was all a dream’: either the debt or the euro participation never existed in the first place, or the Treaty or EU legislation retroactively apply to address the issues, or the Treaty means something quite different from what it was generally thought to mean. It is always preferable to avoid such an approach to the law, but it’s hard to see how any other type of solution could work in this case. Legally, simply put: Greece allegedly should not have joined the euro; it should not have been allowed to run up huge debts; it cannot leave EMU; and it cannot be forced to leave the EU. Economically and politically: Greeks have suffered more than enough; Greece can never pay its accumulated debts while taking austerity measures which depress its economy; but taxpayers of other Eurozone States understandably would like to see their money back.  

These illegalities and economic and political conflicts cannot be resolved within the current framework, so we need to revise it radically. Of the suggestions considered here, the fourth solution has the most appeal: it is consistent not only with the classical tradition of Greek tragedy, but disturbs the current legal framework as little as possible while offering solutions (a fully legal Grexit, effective debt relief) that aim to resolve the situation as best it can be managed. It is impossible to find any solution that would satisfy every legitimate demand, but in my view this approach is the least bad alternative.

Barnard & Peers: chapter 19

Cartoon: Peter Schrank, Independent on Sunday 

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The Five Presidents’ Report on Completing the EMU: A Glimpse at the Future of Europe

Menelaos Markakis, DPhil student at University of Oxford, Academy of Athens scholar

On 22 June 2015 the Presidents of the EU and Euro area institutions presented their report on ‘Completing Europe’s Economic and Monetary Union’. The report provides a roadmap for ‘deepening’ and ‘completing’ the Economic and Monetary Union (EMU). Building on the measures enacted to combat the crisis, the Five Presidents’ Report makes a wealth of valuable suggestions for strengthening the EMU governance framework and deepening economic integration in the Euro area. The EU Presidents recommend that progress be made towards a genuine Economic Union, a Financial Union, a Fiscal Union, and a Political Union.

An overview of the proposed reforms

The proposed reforms would be implemented in two consecutive stages. In the first stage (1 July 2015 – 30 June 2017), the EU institutions and Member States ‘would build on existing instruments and make the best possible use of the existing Treaties’ (p. 5). In the second stage (mid-2017 to 2025), ‘concrete measures of a more far-reaching nature would be agreed to complete EMU’s economic and institutional architecture’ (p. 5). What follows is perforce merely a general indication of the content covered within the report.

(i)                 A genuine Economic Union

As regards the economic ‘pillar’ of the EMU, the Five Presidents’ Report recommends that each Euro area Member State create a Competitiveness Authority which would be ‘in charge of tracking performance and policies in the field of competitiveness’ (p. 7). The rationale behind this proposal is twofold. Such bodies ‘would help to prevent economic divergence’ and ‘would increase ownership of the necessary reforms at the national level’ (p. 7).

It is patently clear that these Authorities are expected to boost economic convergence in the Euro area, most notably in relation to policy areas which fall outside the EU’s competence. These bodies would have a mandate to ‘assess whether wages are evolving in line with productivity and compare with developments in other euro area countries and in the main comparable trading partners’ (p. 8). Moreover, ‘these bodies could be mandated to assess progress made with economic reforms to enhance competitiveness more generally’ (p. 8). The Five Presidents’ Report further recommends that a Euro area system of Competitiveness Authorities be created, in order to coordinate the actions of these Authorities on an annual basis.

The report seeks to link this proposed technique of policy co-ordination to already existing forms of rules-based governance in the Euro area. The Commission is expected to ‘take into account the outcome of this coordination … in particular for … decisions to be taken under the Macroeconomic Imbalance Procedure (MIP), including whether to recommend the activation of the Excessive Imbalance Procedure’ (p. 8). In principle, Euro area Member States are and would remain free to choose whether to follow the best practices in Europe. However, if they choose not to, the Commission and Council might respond to such divergence by subjecting the Member States concerned to the Excessive Imbalance Procedure. In this connection, the presidents of the institutions explicitly recommend that the corrective arm of the MIP be used ‘forcefully’, in order to ‘encourage structural reforms’ (p. 8). Furthermore, they do not shy away from adding that social partners ‘should use the opinions of the Authorities as guidance during wage setting negotiations’ (p. 8).

At a later stage, ‘the convergence process would be made more binding through a set of commonly agreed benchmarks for convergence that could be given a legal nature’ (pp. 5 and 9). These binding standards would be laid down in EU legislation. In some areas, this would lead to ‘further harmonisation’ (p. 9). In other areas, ‘it will mean finding country-specific solutions’ (p. 9).  ‘Significant progress towards these standards – and continued adherence to them once they are reached – would be among the conditions for each euro area Member State to participate in a shock absorption mechanism for the euro area’ (p. 5), which will be discussed below (iii).

It is not clear which competence basis the EU institutions would use for the adoption of such instruments. It might be the case that the Five Presidents’ proposals rest on the implicit assumption that the EU Treaties will be amended before or during stage two of this process. It might also be the case that the EU institutions plan to make full use of Articles 114, 136, 153 and 352 TFEU and/or of the Treaty provisions on enhanced cooperation.

In this connection, the Constitutional Affairs Committee of the European Parliament has proposed that binding economic policy guidelines for the Euro area countries be adopted on the basis of Article 136 TFEU (p. 10 para. 15). It has further called for ‘the dropping of the restrictions under Article 136 TFEU’ and for ‘the upgrading of this article into a general clause for the adoption of legal acts concerning the coordination and setting of legally-binding minimum standards with regard to economic, employment and social policy’ (p. 16 para. 73). This would give more say to the European Parliament on Country-Specific Recommendations.

Moreover, it should not escape our notice that ‘Country-Specific Recommendations would continue to be used in this context’ (p. 9). Furthermore, the report suggests that the MIP ‘be utilised as a tool … to foster reforms and monitor progress in each euro area Member State towards these common standards’ (p. 9). As such, rules-based and co-ordination based governance techniques would continue to ‘form “hybrid” normative grids and accountability frameworks’ (Armstrong).

(ii)               Towards a Financial Union

As regards the proposed Financial Union, the Five Presidents’ Report recommends that the Banking Union be completed and that the Capital Markets Union be launched. First, the report recommends the full transposition into national law of the Bank Resolution and Recovery Directive. It is recalled that, in the opinion of the Commission, 11 Member States have not fully implemented the Directive into national law. Second, the report argues that, before the Single Resolution Fund (SRF) is sufficiently capitalised, an ‘adequate bridge financing mechanism’ should be created for banks that need to be orderly unwound (p. 11). Third, a common backstop to the SRF should be implemented. In the opinion of the EU Presidents, this could be achieved through a credit line from the European Stability Mechanism (ESM) to the SRF (see p. 11). ‘In due course, the effectiveness of the ESM’s direct bank recapitalisation instrument should be reviewed, especially given the restrictive eligibility criteria currently attached to it’ (p. 11). Fourth, the report recommends that a European Deposit Insurance Scheme be launched. Fifth, it proposes strengthening macroprudential supervision at EU level and ‘review[ing] the treatment of bank exposures to sovereign debt, for example by setting large exposure limits’ (p. 12).

Building on the Commission’s Green Paper on ‘Building a Capital Market Union’, the report further proposes launching a Capital Markets Union for all 28 EU Member States. This would ‘ensure more diversified sources of finance’ and would ‘strengthen private sector risk-sharing across countries’ (p. 12). However, financial integration carries risks with it, because a problem in one country can rapidly spread to another. As such, the Five Presidents’ Report recommends that financial supervision be strengthened in the EU and that a single European capital markets supervisor be created (p. 12).

(iii)             Towards a Fiscal Union

As regards the proposed fiscal union, the Five Presidents’ Report puts forward two proposals. First, it recommends that an advisory European Fiscal Board be created. This body would coordinate and complement the national fiscal councils that have been set up in accordance with Regulation 473/2013. The European Fiscal Board ‘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 framework’ (p. 14), thereby adding extra pressure on national Executives and legislatures to take EU fiscal rules seriously. ‘Such 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’ (p. 14).

Second, the report proposes the creation of a fiscal stabilisation function for the Euro area. Such a mechanism would enhance public risk-sharing in the Euro area (p. 4) and could build on the European Fund for Strategic Investments. However, it ‘should not lead to permanent transfers between countries or to transfers in one direction only’ (p. 15). ‘It should also not be conceived as a way to equalise incomes between Member States’ (p. 15). Notably, this stabilisation function ‘should be developed within the framework of the European Union’ (p. 15, emphasis added).

Democratic Accountability, Legitimacy, and Institutional Reform

The discussion thus far has focused on the economic reforms proposed by the presidents of the EU institutions. The focus now shifts to proposed reforms for enhancing the democratic credentials of the EMU. Save for the proposals for a more timely and better-structured parliamentary debate during the European Semester (see p. 17), it is hard to see how these proposals add anything to the already existing ‘six-pack’ and ‘two-pack’ arrangements for ‘institutional dialogue’. Be that as it may, the added emphasis on the role of social partners and civil society, as well as on consultation with EU-level social partners, should be readily applauded (see p. 22).

There is a strong focus on output legitimacy and on synergies between the European and national parliaments. ‘After many years of crisis, governments and institutions must demonstrate to citizens and markets that the euro area will do more than just survive. They need to see that it will thrive’ (p. 5).

Moreover, the report lays down a number of proposals for strengthening the EMU governance framework. More specifically, the EU Presidents suggest that the various treaties concluded outside the formal confines of the Lisbon Treaty be incorporated into the EU Treaties and secondary legislation and that the governance structure of the ESM be ‘fully integrated within the EU Treaties’ (p. 18). The report further suggests that a full-time presidency of the Eurogroup be considered and proposes the creation of a Euro area treasury (see p. 18). In the opinion of the authors of the report, ‘the world’s second largest economy cannot be managed through rule-based cooperation alone’; ‘it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions’ (p. 5). The division of labour between a Euro area and national treasuries is not made clear.

Regrettably, there is no elaboration of what accountability structures should be put in place if a Euro area treasury or fiscal stabilisation function were to be created. Likewise, there is no analysis of the desired accountability mechanisms for the proposed Financial Union. To be sure, requiring the consent of the European Parliament for the appointment of the Chair and the Vice-Chair of the Supervisory Board was a major step forward (see Article 26(3) of Regulation 1024/2013). What is more, there are no proposals for improving transparency in the workings of the Eurogroup, whose role in economic governance has now been heightened. A body actively seeking to foster economic convergence among Euro area countries (see p. 9) should not operate behind closed doors.

Final remarks

There will be no attempt to summarise the preceding argument. It is nonetheless worth highlighting certain features that are of particular importance. First, since ‘all euro area Member States must participate in all Unions’ (p. 5), these proposals would, if implemented,  put the idea of a multi-speed Euro area to sleep. To be sure, it might still be the case that not all Euro area Member States would meet the requirements to make use of the proposed shock absorption mechanism. Second, the EU Presidents’ proposals would, if implemented, entail a massive upward flow of power from the national to the EU/Euro area institutions and bodies. Arguably, this should be matched by increased democratic controls and robust accountability mechanisms. Third, it is particularly noteworthy that the report notes that all members of the Euro area should gain from EMU membership (p. 4). Spreading welfare gains across the Union and promoting economic, social and territorial cohesion might require that more thought be given to the EU’s regional and structural policies (see also the 1989 Delors Report). Lastly, at least some of the proposed reforms might require a Treaty amendment in order to be implemented, and therefore the Prime Minister of the United Kingdom might get his chance to renegotiate Britain’s relationship with the EU and to enshrine the desired precepts in primary law.

Barnard & Peers: chapter 19 

Photo credit: roarmap.org

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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

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