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

 

Steve Peers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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Beyond austerity: the future of EU employment law

Professor Catherine Barnard, Trinity College Cambridge

If the critics are right, the EU social model is dead. Those on the right may well be dancing on its grave; those more sympathetic might mourn its passing. My view is more sanguine. Yes, the European social model (ESM) is certainly facing unprecedented challenges. However, I will suggest that these challenges, caused in part by the EU’s response to the crisis but more generally resulting from a growing hostility towards the European Union project as a whole, are not terminal and that there is – and should be - a continued role for the European social model. The EU’s history demonstrates that the ESM has, in fact, a long-standing ability to regenerate and resurrect itself. In this blog post, I would like to consider the future.

Vandenbroucke and Vanhercke argue that ‘Europe needs a Social Union that can support national welfare states on a systemic level in key functions such as macroeconomic stabilisation, and also guide the development of national welfare states on the basis of general social standards and objectives.’ [1] For the eurozone states this may indeed be the best and necessary solution. However, I want to focus on an agenda which might hold some appeal to an EU of 28, or at least a combination of both Eurozone and non-Eurozone states and this inevitably focuses on the narrower domain of employment law. And my discussion is tempered by political reality. 

Social compact

First, I would call for the creation of a European Social Compact to match the Fiscal Compact. This would contain a strong statement of the value and importance of social policy in the EU and would help to address the long-standing concern that, come the crunch, the EU prioritises economic over social interests. This would send a stronger message to the legislature and to the courts of the role and function of social policy, a message that the phrase ‘social market economy’ has failed to send with significant force. So what might go in it?

Apart from general statements that the EU is about improving the living and working conditions of its population, I would like to see express reference being made to other social rights documents, including the European Social Charter of 1961, to create a greater opening of the EU to other international instruments. I would also suggest the need for a clause which explicitly requires the Broad Economic Policy Guidelines to take account of social matters. More radically, I would also like to see the mandate of the European Central Bank (ECB) to be extended, like that of the Federal Reserve in the US and other central banks, to promoting economic growth, as well as high levels of employment and social cohesion, and not just the maintenance of price stability, as specified in Article 127 TFEU.

Ideally any Social Compact would apply to all 28 states and take the form of a Treaty amendment. However, the current political climate makes this seem unlikely (the UK would certainly vote against, as might a number of other Member States worried about the implications of a Treaty amendment on their own national systems). This inevitably means looking at some sort of free standing Treaty, like the Fiscal Compact, which could be signed up to by interested Member States and have force under international law. Another model for flexibility would be to follow the pattern of the Euro Plus Pact, agreed by interested Member States. It is not legally binding but it is taken into account in the various soft-law processes rather in the way of the Stability and Growth Pact Resolution of 1997. 

Medium-term measures

I fully accept that a Social Compact is a long shot and that any reform protocol, while important, is not exciting. So what else could the EU be doing? I would suggest the EU go back to its roots and, as it did in the 1970s, specialise. There are three areas which could be singled out as needing the EU’s attention, where EU level activity might be justified given the transnational dimension, and where action has a direct connection with the European Semester: ageing population, enforcement, and addressing the consequences of privatisation.

The justification for EU involvement with management of an ageing population relates to the key issue of sustainability of public finances which, as the Eurozone crisis has shown, is a matter of common interest. The EU has long had expertise in the discrimination area, starting with sex and then in respect of other protected characteristics. Addressing age discrimination/extending working life initiatives/flexible working fits in with this specialisation while dovetailing with the EU’s social cohesion agenda. On a related issue, developing family friendly policies - which would include elder care as well as child care – would also fit within this theme. The reform of the Parental Leave Directive serves only to highlight other lacuna in EU provision such as the absence of provisions on the right to request reduced hours of working. There may be room for EU intervention here.

Second, there is a growing body of evidence that migrant workers are being mistreated by some employers in certain sectors, particularly meat processing. If these workers cannot, for practical reasons, enforce their rights, there is a role for the EU to consider intervening to require effective remedies. The new Directive 2014/54 on free movement of workers is a step in the right direction. But there is evidence that migrant workers do not enforce their rights through tribunals. This requires more pro-active enforcement. Is there a role for greater coordination at EU level of, for example, labour inspectors? Or even, more radically, some sort of Europol for labour inspections?

If the EU was to devote its attention to the position of (vulnerable) migrant workers, other issues arise for these workers (as well as for nationals). In particular, what sort of contracts do they have? In recent years there has been a proliferation of new types of contracting, including zero hours contracts, internships, crowd employment and employee sharing. To what extent do individuals engaged in this kind of work benefit from employment protection legislation traditionally given only to those defined as ‘employees’? Should the EU envisage legislating for a new type of contract such as Freedland’s contract to provide personal service which would provide a gateway to employment protection?

Third, privatisation of publicly owned industries and services is clearly an important part of the reform agenda for a number of Member States. What are the employment law implications of this? Does the Transfer of Undertakings Directive 2001/23 need revision to provide meaningful rights to transferees in the event of the transfer and for a significant period thereafter? How does the Directive fit into the public procurement process? Is it time for the transfer rules to be re-examined in the light of the new contexts in which they are being invoked? 

Legal basis to act

I have given some examples of what the EU might do to boost the social dimension. The question is how the EU might deliver them. The EU has significant legal competence to act in these fields – whether under Article 153 TFEU (the principal social policy legal basis), Article 21(2) or Article 25 TFEU (the citizenship provisions), Article 26(3) TFEU (on guidelines and conditions necessary for ensuring balanced progress in all sectors of the internal market), Article 46 TFEU (the legal basis on which Directive 2014/54 on measures facilitating the exercise of free movement of workers was adopted), Article 50(1) TFEU on freedom of establishment (the legal basis on which the directive on diversity information is proposed), the internal market legal bases, Articles 114 and 115 TFEU but, following the Monti II debacle, probably not Article 352 TFEU.

The use of any of these legal bases have (de)merits but what is even more important is the political will to act and that seems to be lacking in a number of Member States. So this raises the question of whether enhanced cooperation should be considered in the social policy field ‘to enable and encourage a group of Member States to cooperate inside rather than outside the Union, where it is established that the objectives pursued by that cooperation cannot be achieved by the Union as a whole’ (see the Unitary Patent case).The use of enhanced cooperation is strictly limited by the framework for enhanced cooperation between Member States found in Title IV of the TEU and Title III (Article 20 TEU) of Part Six of the TFEU (Articles 326 to 334 TFEU).  Provided these conditions are satisfied, there seems no good reason why enhanced cooperation cannot be used in the social field. It is far from optimal – but better than nothing. The Unitary Patent case may suggest, too, that it has the Court’s blessing.

Despite the doomsayers, the EU is still intact after the most tumultuous years of its existence. The European Social Model, too, has been battered by the crisis, but it was already in difficulties before that. Reforms were necessary. In the last five years, economic governance and its reform has predominated, often at the expense of the development of the social dimension. The European Employment Strategy has been accommodated – and largely subsumed by - the European semester. This loss of a separate and distinct identity of the EES has been damaging. (Part of) the EU is conscious of this and it maybe that the new European Parliament and the new Commission will recognise the need to raise the profile of social policy. The EU’s regenerative capacity in the field of social policy needs to be shown again. And there are lots of ideas as to what the EU might do.

A full version of these comments has appeared in (2014) 67 Current Legal Problems 1


Barnard & Peers: chapter 20 

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[1]Frank Vandenbroucke and Bart Vanhercke note, European Social Union: Ten Tough Nuts to Crack (Friends of Europe, 2014), 16. See also Commissioner Andor, ‘Social Dimension of the Economic and Monetary Union: what lessons to draw from the European Elections’, 13 June 2014 http://europa.eu/rapid/press-release_SPEECH-14-455_en.htm.

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Can Thomas Piketty reform capitalism and democracy in the European Union?

Steve Peers

A few months ago, no one would have predicted that a leftwing French economist would become the intellectual equivalent of a rock star, in particular the UK and the USA. Yet Thomas Piketty has managed this feat with Capital, a tome which suggests a radical new thesis about the link between capitalism and democracy.

Like other rock stars, Piketty cannot resist the call to lend to his name to good causes. But unlike Bono and Cher, his support for a French academic initiative for EU reform, published recently in The Guardian, is still linked back to his day job.

The EU used to be reasonably good at doing capitalism, but not very good at doing democracy; now it is not very good at doing either. So the Piketty thesis suggests a number of major reforms to address both failings.

The Piketty proposals

The first of three proposals is that France and Germany, and then other Eurozone countries ‘share’ (he means ‘harmonise’) their corporate income tax. This would entail a common tax base, a minimum rate of 20%, and a ‘federal’ rate of 10% imposed by a Eurozone authority. This would create a Eurozone capacity as regards investment programmes. There should also be automatic exchange of bank information within the Eurozone, an active policy for more progressive taxation of income and wealth and an ‘active fight’ against tax havens outside the Eurozone.

Secondly, there should be a parliamentary chamber for the Eurozone, made up of members of national parliaments, selected on the basis of political party representation in national parliaments. The numbers of representatives from each state would be (strictly?) proportionate to the population. It would start with those Eurozone members that support ‘great political, fiscal and budgetary union’, but would be open to all EU countries that share this goal. There would be a Eurozone minister of finance, and eventually a Eurozone government, answerable to this chamber.

Piketty and co reject the idea that a second chamber could be made up of heads of state, on the basis that a single individual cannot represent a state. They suggest that the European chamber could address issues such as corporate governance, childcare, training, social legislation and a price for carbon emissions.

Thirdly, there would be a debt redemption fund, paying off all debts over 60%, with the Eurozone parliament deciding on ‘the level of the common deficit’ each year.

As for how to achieve these aims, they assume that a Treaty change would be necessary. They assert that ‘the Treaties are being modified constantly’, such as in 2012. This is an apparent reference to the Treaty amendment relating to the European Stability Mechanism (ESM), the treaty between Eurozone states which created a sort of bail-out fund.

Comments

Assuming, for the purposes of argument, that Piketty’s economic analysis is valid, how feasible are the suggested remedies to address the undoubted challenges to capitalism and democracy within the European Union?

Starting with the reformers’ final point, Treaty reform is much harder than they suggest. While it is true to say that there have been several Treaty amendments in recent years, they were all minor. The four amendments agreed since the Treaty of Lisbon consist of: the single new paragraph of the Treaty relating to the ESM, which the CJEU said was not necessary anyway (Pringle); a Protocol clarifying the position of Ireland; a Protocol concerning the effects of the Charter of Rights on the Czech Republic (dropped when that country withdrew its request for it); and a Protocol on the numbers of MEPs. The latter three amendments were all leftovers from the Treaty of Lisbon, either being promises made to get it ratified (the Irish and Czech Protocols), or a transitional measure to take account of the delay in in its entry into force.

In comparison, a plan to negotiate a more significant Treaty amendment relating to economic governance collapsed in December 2011, when the UK and the other Member States could not agree whether there should be specific safeguards built in for the UK’s financial services industry. The last successful major Treaty amendment, the Treaty of Lisbon, took years to negotiate and ratify (taking into also account the efforts to drawn up and ratify the Constitutional Treaty). Perhaps Piketty and his colleagues were all on sabattical in 2005, when the French public rejected that Treaty in a referendum?

Having said that, a Treaty amendment would not be necessary as regards all of the points which they raise. Given the difficulties in agreeing any significant Treaty amendment, and the time it would take to come into force even if the effort is successful, any advocates for EU reform should consider first what reforms can be agreed within the current EU legal order, including enhanced cooperation, and/or in the form of treaties between a limited number of Member States outside the EU legal order.

As regards Piketty’s first proposal, a harmonised corporate tax base and a minimum rate could be the subject of EU law, by means of enhanced cooperation (which means using EU law to adopt measures for a minimum group of nine Member States, if not all Member States wish to participate). In fact, there is already a proposal to harmonise the corporate tax base under discussion. Alternatively, a treaty between Member States could address this issue, if it complies with other EU measures on corporate tax, as well as the Treaty requirement of non-discrimination between Member States.

However, the EU has limited powers as regards wealth and income taxes. On these issues, though, there could be a treaty among Member States, which would have to be consistent with the EU Treaty rules on non-discrimination.

There are many EU measures on the exchange of tax information an EU issue already, and the idea that a group of Member States fight against tax havens within the EU is hugely problematic due to EU free movement rules. Similarly, negotiations with non-EU tax havens can only be carried out by the EU, because to the extent that the issues concerned (like the exchange of information) have been dealt with by internal EU laws already, the EU has exclusive external competence to negotiate such treaties.

As for a Eurozone budget, it should be possible to arrange for one within or outside the Treaties, in either case without amending them.

On the other hand, Piketty’s third suggestion, the debt redemption fund, really will require Treaty reform, since it is likely to infringe the existing ‘no bail-out rule’ by making some Member States at least partly liable for the debts of other Member States.

This brings us to the institutional arrangements. While a Eurozone parliamentary chamber (and the accompanying government and ministers referred to) could be created in a treaty among Member States, any overlap between the powers of these bodies and the existing EU institutions is legally problematic, since the CJEU ruled in Pringle that treaties between Member States were also subject to the rules on the EU’s exclusive external competence. Clearly the proposals of Piketty, et al, would in part create such an overlap, since the Eurozone parliament and government would address issues such as carbon pricing and social legislation. Moreover, any powers concerning a debt redemption fund would entail an underlying Treaty amendment in the first place.

It is also unhelpful that the reform proposals ignore the very existence of the Council – the EU body which is made up of ministers from Member States (as distinct from the European Council, made up of heads of state), and which legally speaking does constitute an existing second legislative chamber (alongside the European Parliament) in the EU.

Certainly, the substance of any reform initiative could be more easily taken forward by means of reforming existing bodies, rather than creating new ones. It might be fairly quick and simple to agree on the creation of a Eurozone-only element of the European Parliament (if MEPs from non-Eurozone states agree to abstain, or if a treaty between Member States creates such a formation and gives it powers distinct from the normal powers of the European Parliament).

The one strong argument for creating a new Eurozone chamber is that such a radical step may be the only way politically to address widespread concern about the legitimacy and democracy of the EU, in particular as a response to the result of the upcoming EP elections. The particular make-up of that parliament being proposed would also address the concerns of the German Federal Constitutional Court about the current make-up of the European Parliament (ie the degressive proportionality that gives smaller Member States more MEPs per person). Again, though, the only safe way to create such a chamber legally is to ensure that its powers are clearly distinct from those of the EU institutions, for instance focussing at first on the harmonisation of taxes which the EU has not addressed, as well as supervision of the functioning of the ESM (which is mainly the subject of an international treaty).

One final consequential suggestion (although it would entail a Treaty amendment). The creation of a Eurozone parliamentary chamber would be bound to lead to disputes over exactly where to locate it. The obvious answer is Strasbourg – in return for the European Parliament finally being liberated from holding most of its plenary meetings there, and moving fully to Brussels. Surprisingly, these French reformers do not raise this issue.

Barnard & Peers: chapter 2, chapter 3, chapter 19

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