Euro-Stabilizing Treaty Gets Court’s Go-Ahead

     (CN) – An en banc Court of Justice upheld Europe’s sweeping attempts to stabilize the euro against the economic crisis gripping the region, allowing a treaty to take effect on Jan. 1 as planned.
     The European Council advanced the amendment to the EU’s foundational law – Treaty on the Functioning of the European Union, or TFEU – in early 2011, and 17 member states approved it earlier this year.
     It established the European Stability Mechanism (ESM), a one-stop shop to mobilize and dispense funding to struggling EU countries. The ESM is designed to safeguard the euro and member states within the eurozone. It had an initial lending capacity of $600 billion, but which finance ministers pushed it up to $850 billion last month.
     Funding for the ESM will come from member states that have approved it, some of which remain Europe’s biggest economic challenges. Powerhouses like Germany, the Netherlands, Austria and Finland stand with struggling Greece, Spain and Italy aboard the massive bailout machine, along with fledgling EU members like Estonia and Slovenia.
     But the decision to tinker with the very fabric of the EU for the purpose of bailing out struggling nations did not sit well with some, including Irish Parliament minister Thomas Pringle, who sued his own government for ratifying the amendment.
     Pringle says the European Council’s decision to amend the TFEU – known as a simplified revision procedure – is illegal, as are the amendment’s intrusions into member-state sovereignty and the economic principles on which the EU was founded. He also argued that Ireland’s ratification of the ESM saddled his country with obligations incompatible with the European constitution.
     After accelerated hearings – Pringle lodged his case with the Luxembourg court in late August – the full 27-member Court of Justice concluded Tuesday that none of Pringle’s objections would invalidate the ESM treaty.
     The council’s use of simplified procedure to advance the amendment applies to internal policies and actions of the EU, and the challenged amendment relates to both, according to the ruling. Otherwise it would have needed to convene national representatives, the European Parliament and the European Commission.
     The amendment also does not give the EU greater powers or encroach on member-state sovereignty, the court held.
     “[The] TFEU states that the union is to have exclusive competence in the area of monetary policy for the Member States whose currency is the euro,” the judgment states. “Moreover, under Article 119(1) TFEU, the activities of the member states and the Union are to include the adoption of an economic policy based on the close coordination of member states’ economic policies, on the internal market and on the definition of common objectives, conducted in accordance with the principle of an open market economy with free competition.”
     While monetary policy belongs to the EU, the ESM aims to safeguard the stability of the euro area as a whole, the court held, distinguishing economic policy from monetary policy.
     “Consequently … the member states whose currency is the euro are entitled to conclude an agreement between themselves for the establishment of a stability mechanism of the kind envisaged by [the amendment],” the court wrote. “However, those member states may not disregard their duty to comply with European Union law when exercising their competences in that area. … [T]he reason why the grant of financial assistance by the stability mechanism is subject to strict conditionality under [the amendment to the treaty] is in order to ensure that that mechanism will operate in a way that will comply with European Union law, including the measures adopted by the inion in the context of the coordination of the member states’ economic policies.”
     The court also rejected Pringle’s fear that the ESM could destabilize prices in the euro area.
     “Under Articles 3 and 12(1) of the ESM Treaty, it is not the purpose of the ESM to maintain price stability, but rather to meet the financing requirements of ESM members, namely member states whose currency is the euro, who are experiencing or are threatened by severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its member states,” the court wrote. “To that end, the ESM is not entitled either to set the key interest rates for the euro area or to issue euro currency, while the financial assistance which the ESM grants must be entirely funded … from paid-in capital or by the issue of financial instruments.”
     The court continued: “Any effect of the activities of the ESM on price stability is not such as to call into question that finding. Even if the activities of the ESM might influence the rate of inflation, such an influence would constitute only the indirect consequence of the economic policy measures adopted. It follows from the foregoing that [the amendment does] not preclude either the conclusion by the member states whose currency is the euro of an agreement such as the ESM Treaty or their ratification of it.”
     Except for advancing the amendment, lawmakers have taken a hands-off approach by allowing ratifying member states to fund the ESM and dispense the cash -underscoring the power of member states to make agreements amongst themselves, according to the court. It added that the amendment does not change laws that prohibit the European Central Bank or state-run banks from handing out state aid or purchasing public bonds.
     “The referring court asks whether the conclusion and ratification by the member states whose currency is the euro of an agreement such as the ESM Treaty is not intended to circumvent the prohibition laid down in [the TFEU] since those member states may not, either directly or through intermediary bodies created or recognized by them, derogate from European Union law or condone such a derogation,” the judgment states. “In that regard, it must be held that Article 123 TFEU is addressed specifically to the ECB and the central banks of the member states. The grant of financial assistance by one member state or by a group of member states to another member state is therefore not covered by that prohibition.”
     “It is apparent from the ESM Treaty that it is the ESM which grants financial assistance to an ESM member when the conditions stated in those provisions are met,” it added. “Accordingly, even if the member states are acting via the ESM, the member states are not derogating from the prohibition laid down in Article 123 TFEU, since that article is not addressed to them. Moreover, there is no basis for the view that the funds provided by the ESM members to the ESM might be derived from financial instruments prohibited by TFEU. Consequently, Article 123 TFEU does not preclude either the conclusion by the member states whose currency is the euro of an agreement such as the ESM Treaty or their ratification of it.”
     Finally, the court rejected Pringle’s contention that the ESM treaty is nothing more than a colossal bailout scheme perpetrated by EU government officials.
     “It must be stated at the outset that it is apparent from the wording used in [the treaty] to the effect that neither the union nor a member state are to ‘be liable for … the commitments’ of another member state or ‘assume [those commitments]’, that that article is not intended to prohibit either the union or the member states from granting any form of financial assistance whatever to another member state,” the court wrote.
     The amendment tightens lending restrictions on the ECB and state-owned banks, which supports the view that the ESM will not serve as a bailout machine, it added.
     “The granting of financial assistance to an ESM member in the form of a credit line … or in the form of loans, in accordance with [the ESM treaty] in no way implies that the ESM will assume the debts of the recipient member state,” the judgment states. “On the contrary, such assistance amounts to the creation of a new debt, owed to the ESM by that recipient member state, which remains responsible for its commitments to its creditors in respect of its existing debts.”
     All financial assistance must be repaid with interest to the ESM, it added.
     Advocate General Juliane Kokott published a separate view with the court’s judgment.

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