Eurozone Flashcards
Scope of issue with economic governance
Functioning of the economic and monetary union (single monetary policy aka the Eurozone)
Number of MS in Eurozone
19
How to join euro
Convergence criteria over 2 years
Formal derogation from Art 130 TFEU
Opt out: UK, Denmark
Not currently considering: Sweden, Poland, Czech Republic, Denmark
Currently considering: Croatia, Bulgaria, Romania
Non-participation MS’ contribution
National central banks own shares in ECB but paid very small percentage of subscribed capital e.g. French CB pay out is 26.5x higher than English CB
Creation of single market
Art 63 TFEU
Introduction of single currency
Art 128 TFEU
Exercise of EU level control over national budget deficit
Art 126(1) TFEU: avoid excessive government deficits
- Hard to attain, only Lux and Ireland met requirements, so value targets were relaxed (moving towards 60% rather than strictly 60%)
- Intervention blocked by Germany and France
Coordination of national economic policies and acceptance of surveillance mechanisms
Rationale: single currency
Art 120-121, 128 TFEU
Role of European Central Bank
Independence from other EU institutions: Art 130 TFEU
Financial independence: instructed to pursue ‘price stability’
Composition of European Central Bank
a) Governing Council (Art 283 TFEU)
b) Executive Board
c) General Council (Art 44 TFEU)
Key tasks of European Central Bank
a) Exclusive competence over EU monetary policy
b) Prudential supervision over banks
c) Lender of last resort
Exclusive competence over EU monetary policy
Art 282 TFEU
Exception: giving loans (Art 123 TFEU)
Art 127(2) TFEU: some monetary policy decisions can affect and indirectly affect non-Euro countries’ economic and monetary policies
Prudential supervision over banks
Rationale: stability of banks key to maintaining Eurozone
Decision-making powers: minimum reserve, level of exposure of risk, liquidity requirement, stress test, non compliance fines
Single Supervisory Mechanism (large banks regulated directly by ECB)
Single Resolution Mechanism (restructuring procedures for troubled banks)
Lender of last resort
Since inception
De facto last resort lender for Euro area governments - Outright Monetary Transactions (2012)
Unlimited purchase power of bonds, conditional on beneficiary governments’ compliance with ESFS/ESM programme and other IMF programmes
Problem with being lender of last resort
Conflicts Art 123 TFEU
Response by ECB to being lender of last resort
While indirectly purchasing bonds, it is not financing any deficit or engaging in fiscal policy
Instead: exercise powers to have appropriate interest rates in the markets
Overview of developments from economic crises
a) European Stability Mechanism
b) Enhanced macroeconomic surveillance system
c) Bail out programme
European Stability Mechanism - function
Provide financial assistance to Euro area MS experiencing or threatened by financial difficulties
How: issue money market instruments and medium and long-term debt
Backed by paid in capital of 80 billion euros
Central body: board of governors made out of Euro-area finance ministers
European Stability Mechanism - problem
Legal fiction since key EU institutions are central to functions
European Commission, ECB assess assistance requests and terms for granting support
EC/ECB/IMF eventually decides terms of assistance through MoU, in charge of verifying compliance
European Stability Mechanism - legal challenge
Pringle v Ireland (Irish politician, claim that it contravened the no loan/no bail out Treaty articles)
No loan rule: granting of financial assistance in form of credit line does not imply assumption of debts, but creates a new debt owed to ESM
No bail out rule: buying state bonds does not imply assumption of debt, since recipient MS stills has to repay debts
European Stability Mechanism - legitimacy and accountability problem
Rule of law: supervision of the organs, including judicial review of decisions unclear
Constraints of EU institutions:
Participating MSs not implementing EU law when setting up ESM
No cover by Charter
Enhanced macroeconomic surveillnace system
a) European Semester
b) Six Pack
c) Fiscal Compact
European Semester - origins
Economic policy does not fall within EU competences
Exception: Art 121(1) TFEU: economic policies to be coordinated
Takes advantage of spillover effect where one area of integration necessitates integration in another
European Semester - through greater coordination under the exception of Art 121(1) TFEU
6 month cycle where economic and budgetary polciies are streamlined
Effects of European Semester
EU can pressure states and influence other areas of law where they lack competence e.g. labour law
Example:
a) CSR 2012: dismissal protection system in France
b) CSR 2012-214: flexibility of wage-setting system in Belgium
Six Pack
Reform package of 6 legal acts reforming the Pact for Stability and Growth - more teeth
Prevention and correction of macroeconomic imbalances
Non-compliance: possible economic sanctions - imposition of interest-bearing deposit on MS or even annual deposit in case of repeated failures
Example: Italian populist government
Critique of EU institutions in macroeconomic goals (Six Pack)
Focus on low deficit may cause recession
No argument for increasing government borrowing during cooling economy
Fiscal Compact
Procedure for controlling budget policy of MS intensified via intergovernmental treaty
Required to balance national budgets, avoid government deficits for more than 0.5% of GDP
Implications of Fiscal Compact
Separate from Treaties: can pull out
EU not directly making decisions, only coordinating decision-making by MS
Such fiscal policy decisions interdependent
Some areas not within EU competence are now within indirect purview of EU law since MS cannot act in a way that would compromise the project
Bail out programme
Financial assistance programmes agreements for MS worst affected by sovereign debt crisis from 2010
More like a loan agreement than a bail out programme
Diverse for legal nature/basis of mechanisms used so far
Diversity of legal nature/basis of mechanism
1st loan to Greece: Bilateral agreement between MS and Greece, complemented by IMF standby agreements
Ireland, Portugal: EFSM (emergency funding programme using EU budget as collateral)
- Based on Art 122(2) TFEU
- Replaced by EFSF due to lack of funds
2nd loan to Greece: EFSF
Cyprus: ESM that replaced EFSF
Content of loan agreements
Condition on MoU (reforms to achieve public deficit reduction measures)
e..g. increasing speed and depth of privitisation, lowering minimum wage
Assumption of proposed reforms
Deregulation, right-wing solutions will stimulate growth by technocratic bodies
Implementation of loan agreement
Progress on implementing reforms regularly reviewed by bodies e.g. Ireland, EU officials in finance ministry
Possible benefit for governments who use EU influence as excuse for new policy implementation
Undermines national sovereignty
Legal status of bail out agreements
Kilpatrick: questions legality of the reforms suggested
If no money to fulfil socio-economic policy, should other states give money to do so – limited solidarity (McCrea)
e. g. Slovakia (poorer, unwilling) vs Greece (rejected loan conditions, wanted unconditional loan)
- Moral hazard
- Eurozone created interdependence without corresponding rise in solidarity
Possibility of legal challenge to bailout agreements (not EU treaties)
CJEU refused to accept, measures were “national measures” (even though they were carried out to meet the conditions) (ADEDY v Council)
Use of preliminary ruling also fruitless (Sindicato dos Bancarios, Corpul National al Politisitilor)
Effect of no legal challenge
Legal gap where EU institutions make reforms conditional for MS to attain loans, but don’t assume responsibility for consequences of implementations
Acceptance of EU institutions’ lack of liability for damages for actions within ESM framework
Ledra Advertising (Cyprus bail out)
Challenge to Outright Monetary Transactions - Peter Gauweiler
a) Economic or monetary policy?
Monetary policy, within powers of ECB, aimed at securing ‘single’ nature of monetary policy and effectiveness of transmission mechanisms (NOT ECONOMIC POLICY)
b) Overdraft?
OMT not overdraft, increased MS’ impetus to follow sound budgetary policy and circumvent the objective pursued by prohibition of monetary financing, that it affects macroeconomic policy was indirect and incidental
Critical reception by GCC: weak intensity of review, but held that programme did not manifestly intensify ECB’s competences
Challenge to Outright Monetary Transactions - Weiss
a) Quantitative easing was ultra vires, deficit financing?
- Not deficit financing, since bond buying was indirect
- Pursues monetary policy goals
- But no clear line
- Limitation on programme, conditionality provided limit on exposure
b) Programme’s compatibility with Germany core constitutional identity
Proposals for future of Eurozone - 2012 Four Presidents’ Report
a) Banking union
b) Integration of budgetary policies
c) Strengthening of democratic legitimation, accountability
Begg: only banking union in progress
Proposals for future of Eurozone - 2015 Five Presidents’ Report
Contentious components dropped, only vague call to fiscal stabilisation
Begg: extent of political resistance to economic integration led Presidents to cease aiming for measures that were seen as vital only few years earlier
